Investors have the opportunity and responsibility to ensure their investment portfolios align to the Paris Agreement and transition to a Net Zero position. The concept of Net Zero is not fully developed, however, urgent action is needed if the effects of climate change are to be contained.
The topics discussed below are a non-exhaustive list of actions needed to achieve a just transition to Net Zero.
Introduction to Decarbonising
The effects of climate change are felt across the world. Urgent action is needed to address the climate change crisis.
In October 2021, ten Community Trusts joined together as founding signatories to the Funders Commitment to Climate Action. The seven point commitment includes a commitment to decarbonise our investment portfolios.
This resource is an overview of current thinking to explore some options needed to achieve a net zero investment portfolio. This notion of a net zero investment porfolio is still developing and it is expected this resource will be updated to reflect current thinking.
Philanthropy New Zealand recently hosted Barry Coates from Mindful Money, to discuss making net zero a reality: Driving down emissions in investment portfolios. Mindful Money works to shift investment funds away from extractive investments to regenerative investments including a intentional shift to a net zero emissions world.
In this video Barry introduces why and how asset owners can make net zero a reality.
In 2021, Russell Investments released two foundational reports –
These reports provide a solid introduction to terminology and metrics relating to investment and climate change.
The climate change glossary is a useful guide to understanding climate change terms and concepts.
Trustees have a fiducary duty to consider climate change within the investment portfoilo. Trustees need to consider how they articulate their organisation’s commitment to climate change, the frameworks they use to understand climate change, and how they report progress.
Trustees Fiduciary Duties – Legal Opinion
The report concludes:
"Trustees’ duties of prudent investment, to act for the benefit of beneficiaries, and of impartiality, all align when considering their ability and obligation to consider climate-related financial risk to trust investments. In light of the increasing understanding and awareness of climate-related risk in New Zealand in 2021, trustees will be expected to identify and assess climate-related financial risk to determine whether that risk is likely to be material.
While ever context-dependent, trustees should actively consider whether trust investments are at risk of material financial impact as a result of physical impacts or regulatory, market or legal developments connected to climate change. If so, then those trustees should appropriately manage that risk over the mid to long term, including by diversification and/or divestment of certain investments if appropriate. These assessments are not easy, but they are important for trustees to work through to properly discharge their duties to present and future beneficiaries."
Net Zero Investment Commitments
Trustees can articulate their investment intentions by committing to an investment net zero strategy. Listed below are two globally recognised net zero investment commitments.
The Alliance was started in 2019 and now has 73 members with over $10 trillion in funds under management. Only asset owners that commit to achieving net zero portfolios by 2050, and that establish intermediate targets every five years in line with the Paris Agreement’s goal of limiting warming to 1.5°C, can participate in the Alliance. This represents a rapid growth in asset owners leading by example, and expectations that real economy companies will do the same.
The Paris Aligned Investment Initiative (PAII) was established in May 2019 by the Institutional Investors Group on Climate Change (IIGCC) at the request of asset owner members. It now involves over 110 investors representing $33 trillion in assets. As of March 2021, the initiative has grown into a global collaboration supported by four regional investor networks – AIGCC (Asia), Ceres (North America), IIGCC (Europe) and IGCC (Australasia).
Ideally, investors should commit to the goal of achieving net zero portfolio emissions by 2050, or sooner, and adopt an investment strategy consistent with the achievement of global net zero emissions by this date.
Asset owners, employing a net zero investment strategy led approach, that sets real net zero reduction targets at a portfolio and asset level, and implementing an engagement and advocacy strategy, ensures investors can maximise their impact in driving real-world decarbonisation.
Objectives and targets set the direction and ambition of a net zero investment strategy and act to monitor the strategy’s effectiveness. Targets should be set in line with science-based pathways that are consistent with achieving net zero global emissions by 2050, or sooner. The main driver for achieving portfolio emissions reduction targets should be the increasing alignment of assets within the portfolio with net zero pathways.
Portfolio construction is a relevant tool to weigh portfolios towards assets aligned to or transitioning towards net zero. Selective divestment, as part of the toolbox, is recommended in specific circumstances for aligning a portfolio.
At a portfolio level, investors should set reduction targets and review them every five years. Emissions reduction targets and monitoring at the portfolio level should include at least scope 1 and 2 emissions initially, and phase in scope 3 emissions over time.
The key driver for achieving net zero targets and securing emissions reductions in the real economy is the increasing alignment of assets to net zero pathways within asset class portfolios.
The Paris Aligned Investment Initiative has produced an implementation framework aimed at guiding investors (and their asset consultant) on producing an investment portfolio that meets the Paris commitment.
Advocacy and Engagement
Stewardship and engagement are recognised as a key tool supporting real-world decarbonisation directly and helping mitigate the existential risk of climate change.
The Paris Aligned Investment Initiative recommends that an investment strategy should prioritise engagement and stewardship and direct management (where relevant), particularly for existing assets, as the primary mechanism to drive alignment with a net zero future.
Similarly, the UN Convened Net Zero Asset Owner Alliance states that conducting stewardship activities within investment portfolios is one of the most direct levers that investors can use to achieve real-world decarbonisation.
The UN Convened Net Zero Asset Owner Alliance produced, The Future of Investor Engagement: A call for systematic stewardship to address systemic climate risk, which focuses on three critical calls for all investors to expand their climate stewardship activities. These are:
Investors should identify opportunities in their current stewardship practices to address systemic risk. This includes developing processes and providing resources that support systematic stewardship activities like engagement, proxy voting, and public discourse.
Investors should pursue new means of direct collaborative engagement such as sector/value chain engagement and asset manager engagement.
Investors should work to influence the rules of the game to enable a transition to net zero through policy engagement, in collaboration with other stakeholders.
The Climate Action 100+ initiative is an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change in line with the goals of the Paris Agreement. This webinar discusses the critical sector priorities and milestones, what effective investor engagement strategies look like and identifies barriers and offer solutions to achieving real progress.
Asset owners of all sizes can conduct an effective engagement strategy by collaborating with the asset consultants, fund managers and like-minded investors. Trust Waikato, through its Responsible Investment Framework, undertakes biennial fund manager engagement via a survey.
In 2015, the Financial Stability Board set up a Task Force on Climate-related Financial Disclosures. This group, chaired by Michael Bloomberg, has developed voluntary, consistent climate-related financial disclosure guidelines for use by companies in providing information to investors, lenders, and insurers.
The New Zealand Government has passed legislation making climate-related disclosures mandatory for some organisations. The requirement will apply to large publicly listed companies, insurers, banks, non-bank deposit takers and investment managers.
Most signatories to the Funders Commitment for Climate Action will not be captured by The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021. There is scope to voluntarily report under the Taskforce for Climate-Related Financial Disclosures (TCFD) regime and given the similarity between some signatories there is opportunity to collaboratively and collectively undertake TCFD reporting.
The Climate Disclosures Standard Board is an international consortium of business and environmental NGOs. They are committed to advancing and aligning the global mainstream corporate reporting model to equate natural capital with financial capital. Below is a short video they have produced – Introduction to the TCFD Recommendations.
The TCFD Knowledge Hub hosts a range of resources that can help you identify, analyse and report climate-related financial information. The platform has been created to support the adoption of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and the development of high-quality, consistent, and comparable climate-related financial disclosures.
In 2019, the New Zealand Super released a white paper setting out the fund’s climate change strategy. With the development of the Task Force for Climate Change Disclosures, the fund revised its strategy and released their Climate Change Report 2021.
In the video below, Matt Whineray (CEO, New Zealand Super Fund) discusses the New Zealand Super Fund approach and strategy to climate change.
BayTrust have embedded climate action into their role as a sustainable investor by strengthening their investment policies:
The asset consultant industry has a key role to play in facilitating the transition to net zero emissions. Asset consultants can embed net zero considerations into their advisory work, which can help the investment industry make rapid progress on climate goals.
Asset consultants provide strategic advice to asset owners, such as pension funds, sovereign funds, endowments, insurers, foundations, and family offices in areas including investment beliefs and strategy, asset allocation, and asset manager selection. They also provide broader education on the long‐term investment risks and opportunities related to climate change, such as transition risk, physical risk, and stranded assets risk. These firms are often the critical link between asset owners and asset managers, determining which firms and strategies are favoured for selection. Consultants also provide guidance to asset managers about ESG capabilities and climate competence, as well as advising on the development of new investment solutions.
In September 2021, twelve investment consulting firms, responsible for advising institutional asset owners on assets of approximately $10 trillion, launched the Net Zero Investment Consultants Initiative (NZICI).
NZICI sets out nine actions that investment consultants will take to support the goal of global net zero greenhouse gas emissions by 2050 or sooner. The principal actions include investment consultants integrating advice on net zero alignment into all their investment consulting services and supporting efforts to decarbonise the global economy. This is done by helping clients prioritise real economy emissions reductions, reflecting the target of 50% global emissions reduction by 2030 or sooner. These actions will effect change when carried out at the scale of signatories’ assets under advice.