Net-Zero Asset Owner Alliance Updates Protocol

The Net-Zero Asset Owner Alliance (NZAOA), a member-led initiative of 84 institutional investors, with over US$11 trillion in assets under management, released a significant update to its Target Setting Protocol, ratcheting up scope and coverage for its members.

In its third edition of the document, the latest protocol expands its methodology and clarifies its expectations to members, ensuring they set short-term decarbonisation targets that put them on a pathway to reaching net-zero greenhouse gas (GHG) emissions in their investment portfolios by 2050.

The update demonstrates that its members remain steadfastly committed to achieving net zero and aligning with 1.5°C pathways with no or limited overshoot.

Based on the Intergovernmental Panel on Climate Change’s (IPCC) most recent pathways, the Alliance identified emissions reduction requirements for sub-portfolio targets in the range of -22% to -32% by 2025 and -40% to -60% by 2030.

Günther Thallinger, Board Member Allianz SE and Alliance said: “The Alliance continues to enhance depth and coverage with each edition of the Target Setting Protocol, aiming to build a coherent, consistent trajectory aligned to the demands of the latest climate science. We show that working towards net zero is possible. It is a matter to decide to do so.”

“We are observing a divergence of real-economy emission pathways and scientific pathways for limiting temperature rise to 1.5C. With this Protocol the Alliance increases expectations for its members and calls on policymakers and corporates to move in line with science.”

Adding Crucial Asset Classes

Given that data has been less readily available for unlisted equity (compared to their publicly listed counterparts), setting decarbonisation targets for private equity portfolios presents a bigger challenge.

However, the latest Protocol formulates the methodology for direct private equity investments and requires members to commence setting targets in 2023 and cover all new private equity assets by 2025.

For the first time, the Target Setting Protocol also includes guidance on carbon accounting for sovereign debt, which is a significant asset class for many asset owners.

The Alliance has joined forces with PCAF (Partnership for Carbon Accounting Financials) and ASCOR (Assessing Sovereign Climate-related Opportunities and Risks) to develop the accounting and assessment standards respectively.

Once finalised, the methodologies developed will offer investors a tool for a common understanding of sovereign exposure and climate alignment.

Lastly, the Alliance members are also asked to phase in target-setting on new commercial real estate loans using the Carbon Risk Real Estate Monitor (CRREM) 1.5°C national pathways or the IPCC’s no or limited overshoot 1.5°C global range. In 2024, the members will also report the share of the portfolio that is covered by the disclosure target on new investments.

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