The Institutional Investors Group on Climate Change (IIGCC) is today launching the ‘Net Zero Investment Framework’, enabling investors to maximise the contribution they make to decarbonisation of the global economy and tackling climate change. This is achieved by ensuring investment portfolios are aligned with net zero emissions and investors are working in a comprehensive manner to help deliver on the goal of the Paris Agreement to keep global warming below 1.5°C. Building on IIGCC’s existing work to date, the finalised Framework is being published in partnership with other investor groups across North America, Asia and Australasia. It will be rolled out globally as the basis for investors worldwide to implement their net zero strategies.
22 asset owners, with $1.2 trillion (Tn) in assets, have used publication of the Framework to commit to achieve net zero alignment by 2050 or sooner. The funds in question are drawing on the Framework to deliver these commitments, alongside a number of asset managers who are already working with clients on net zero alignment.
This means 35 investors, managing $8.5 Tn in assets – including both asset owners and asset managers – are already putting the Framework to practical use. Just some of these investors include Scottish Widows, the Environment Agency Pension Fund, NN Group, New York State Common Retirement Fund, Royal London, National Grid UK Pension Scheme, the Church of England Pensions Board, PKA, Brunel Pension Partnership, Northern LGPS (covering the Greater Manchester, Merseyside and West Yorkshire local government pension scheme funds), PensionDanmark, AP2, Lloyds Banking Group Pensions Trustees Limited, Nest Corporation, Bundespensionskasse AG, AXA Investment Managers, DWS, Aberdeen Standard Investments, PIMCO, Legal & General Investment Management, Jupiter Asset Management, Robeco and Fidelity International. The majority of these early adopters participated in creation of the Framework and are taking the first steps to defining an industry standard approach to ‘net zero investing’. They are part of a wider group of more than 110 investors representing $33 trillion in assets, involved in its development through the Paris Aligned Investment Initiative, which was launched by IIGCC in 2020 and is now being taken global.
“The global investment community has been called on to play its part in the transition to net zero – and it is answering that call,” explains Stephanie Pfeifer, CEO, Institutional Investors Group on Climate Change. “This new swathe of net zero commitments from asset owners demonstrates the growing determination from investors to make important decisions to support a net zero and resilient future.”
“Commitments are vital, but only meaningful for the long-term when realised. The net zero transition itself requires an ongoing transition from making commitments to delivering impact. The Net Zero Investment Framework, developed with and for investors, is a blueprint for action that will enable and support investors in reaching these goals.”
Many asset managers using the Framework have also made net zero commitments through the Net Zero Asset Managers initiative launched in December, which is also delivered by IIGCC and partner investor groups.
More investor commitments such as those announced today will follow, helping build momentum in the run-up to the United Nations COP26 climate talks, taking place Glasgow in November. The Framework is also expected to be included in the United Nation’s Race to Zero Campaign, following the completion of an independent assessment process currently underway.
“Investing in a net zero future is key to tackling the climate crisis and unlocking truly sustainable growth. It is actually in the interest of all,” explains Patricia Espinosa, Executive Secretary, United Nations Framework Convention on Climate Change. “I encourage others to join investors already showing leadership in using the Net Zero Investment Framework. The race to a net zero future is on and the benefits it offers are critically important.”
“Bringing climate change to the top of the agenda and ensuring that Britain’s pension investments act on managing climate change risk will not only help the UK reach net zero, but ensure a brighter future for all,” adds UK Minister for Pensions Guy Opperman. “In the run-up to COP26, more countries than ever are signing up for net zero. This creates huge opportunities, but also risks, for institutional investors such as pension schemes. That is why we’re the first major economy to legislate to require pension schemes to set targets to manage their own climate risks.”
“I therefore welcome both the ambition and hugely practical guidance contained in this framework, which will help even more institutional investors aim for net zero.”
The Framework enables investors to decarbonise investment portfolios and increase investment in climate solutions, in a way that is consistent with and contributes to a 1.5°C net zero emissions future. Investors do this by developing a ‘net zero investment strategy’ built around five core components of the Framework. These key components are: objectives and targets, strategic asset allocation and asset class alignment, alongside policy advocacy and, investor engagement activity and governance.
The ‘net zero investment strategy’ is also underpinned by three types of targets, as the main metrics to measure effective action:
- Portfolio level targets for decarbonisation and investment in climate solutions
- Timebound portfolio coverage targets for companies and assets to meet net zero or aligned criteria
- Engagement coverage threshold (>70% emissions in material sectors) ensuring intensive engagement to drive the transition
Investors drawing on the Framework explain:
“We’re proud to support the launch of the IIGCC Net Zero Commitment as founding signatories,” explains Barry O’Dwyer, CEO, Royal London Group. “The IIGCC commitment reflects our view that decarbonising our portfolio alone is not enough. As institutional investors we must influence the companies we invest in to reduce their emissions and invest in the solutions that will help us realise the goals of the Paris Agreement.”
“Becoming net-zero is the best way we can protect our members’ from the investment risks posed by climate change,” adds Helen Dean, CEO Nest. “The evidence is clear – companies adapting for the low carbon economy should have a better chance of long-term success and profitability.”
“We hope other investors follow suit and use the Net Zero Investment Framework. There are challenges to overcome in developing net zero aligned portfolios, but working together and sharing ideas gives us the best chance of finding the right solutions.”
“The importance of investors contributing to achieve net zero emissions is clear while the economic benefits and investment opportunities of renewables and renovating buildings are becoming even more important,” says Asoka Wöhrmann, CEO, DWS Group. “Guided by the IIGCC framework, DWS is working to ensure that we select the best net zero emissions investment framework that will deliver a positive outcome for the world and our clients.”
“It is easy to make a long-term commitment to be net zero, but the key question is the path you take to achieve it,” adds Adam Matthews, Chief Responsible Investment Officer, Church of England Pensions Fund. “We have jointly chaired this process to pool the expertise and wisdom of the asset owner and fund manager community to create a framework that is both practical and credible and gets you to net zero. This is a vital part of the investment architecture that was missing. As a fund we are committed to using this Net Zero Investment Framework and are delighted to make the Asset Owner commitment today.”
“Climate shocks, like storms and heatwaves, present a material risk to investments,” adds Emma Howard Boyd, Chair, Environment Agency. “We wanted to help Environment Agency Pension Fund members to be part of the solution so we asked them what they wanted and 92% of those surveyed told us they thought it was important the Fund had a net zero target. We have been using the IIGCC framework to help us set out a roadmap to a net zero target. It has helped us think about how our portfolio needs to evolve. The Net Zero Investment Framework is an excellent tool and we would encourage all investors to use it.”
“Asset owners have a vital role to play in supercharging the UK’s transition to low carbon and unlocking the huge benefits the green economy presents for us all,” explains Antonio Lorenzo, Chief Executive of Scottish Widows. “That’s why we’ve set ourselves a target to ensure every penny of our £170bn investments are net zero by 2050 and have signed the IIGCC Net Zero Asset Owners’ pledge.”
“The IIGCC’s Net Zero Investment Framework, which we helped develop, provides both a flexible and targeted approach to cutting carbon emissions in line with the Paris Agreement. By signing up to the framework, asset owners can send a clear signal to companies and policy makers that they will only back businesses which are actively shifting to a low carbon approach.”
“Climate change poses significant risks and opportunities for the New York State Common Retirement Fund, the markets, and the economy as a whole,” said Thomas P. DiNapoli, sole fiduciary of the New York State Common Retirement Fund. “At the same time, it is becoming clear that efforts to comply with the Paris Agreement are on the rise by countries and companies alike. The actions listed in the Net Zero Asset Owners Commitment provide examples of the sort of forward-thinking ideas investors can use to protect the long-term value of their investments. We have put the Fund in a strong position for a net zero future and strongly encourage others to do the same.”
“The Net Zero Investment Framework provides a much-needed toolkit for putting our commitments into practice,” comments Jenn-Hui Tan, Head of Stewardship and Sustainable Investing, Fidelity International. “Investors need to take a holistic approach to ensure they contribute to the transition to a low carbon economy as reducing the carbon footprint of portfolios is not enough to solve climate change. Fidelity International is actively working on embedding the Framework into our company analysis, stewardship activities and fund range.”
“We are proud to have contributed to the IIGCC’s Net Zero Investment Framework,” adds Rod Paris, CIO, Aberdeen Standard. “As investors we have a critical role to play in achieving net zero emissions globally. As we seek to take tangible action, this innovative framework is extremely valuable as it provides a practical means for developing net zero solutions for our clients and supporting the goals of the Paris Agreement.”
The Framework is intended to provide a practical implementation guide, supporting investors in defining and delivering their own net zero investment strategy. While this process will always be heterogeneous and unique to each investor, the Framework helps inform these approaches based on best practice methodologies and metrics. An increasing number of investors are expected to use the Framework following its publication.
The four investor groups are also coming together to drive investor net zero commitments and global uptake of the Framework through the Paris Aligned Investment Initiative. Established by IIGCC at the request of European asset owner investors in August 2020, the initiative will now go global. This collaboration will increase the reach of the initiative and help address the urgency of supporting investors worldwide in driving a shift to ‘net zero investing’ across the sector as a whole.
The investor organisations involved are: Institutional Investors Group on Climate Change (IIGCC) engaging with European investors, Ceres covering North America, the Asia Investor Group on Climate Change (AIGCC) covering Asia and the Investor Group on Climate Change (IGCC) covering Australasia.
Bringing investors together, the Paris Aligned Investment Initiative will be the global forum to support asset owners and managers in setting and delivering on net zero targets. Activity will build on existing collaboration, in providing investors with a best practice standard and consistent approach to net zero alignment across the global investment sector. Work will also continue in expanding the focus of the Framework8.
The urgency of addressing the climate crisis is increasingly understood and achieving net zero emissions is key to success. Momentum is increasingly clear, with nine of the world’s 10 largest economies pledging to reach net zero emissions by mid-century. Investors have a vital contribution to make to this process but have lacked a standardised approach to convert intent into practical decisions and action. The Net Zero Investment Framework fills this gap.
The findings of real-word portfolio testing, using the Framework to assess the impacts of net zero alignment – across five investor funds collectively valued at $1.3 Tn, will also help strengthen the case for further uptake9. The analysis developed by Vivid Economics, shows net zero alignment is a no regrets choice with scope for investors to secure notable benefits over a business-as-usual approach to investment10. This includes the opportunity for significant reductions in exposure to climate-related financial risks and helping ensure investors are best placed to benefit from opportunities that arise as decarbonisation of the global economy continues to gather pace.
IIGCC’s Paris Aligned Investor Initiative has been working with investors since May 2019 with the goal of supporting and enabling investors to commit to and transition to net zero. The UN-convened Net-Zero Asset Owner Alliance is a group of asset owners working in this direction, and issuing interim target-setting milestones starting in 2025. Engagement is taking place between the two initiatives with a view to further aligning approaches to achieving net-zero investment portfolios. Discussions are ongoing and detailed work is about to start.