IIGCC sets out roadmap to net-zero

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Guest post

David Russell is Head of Responsible Investment at USS Investment Management Ltd. This blog is written in his capacity as a member of the TPI Steering Group.

The development of the Net Zero Investment Framework is a big step forward. Now we must ensure that it meets the needs of all investors before completion.

One of the most positive developments of the last year, despite all of its turbulence, has been the emergence of net zero commitments by countries from the UK to New Zealand, and by over 900 companies.  Net zero targets are consistent with the Paris Agreement goal to keep global warming well below 2°C and it is important that investors also look at how they can join the race to net zero.

However that is easier said than done.

Historically one of the main barriers to investors committing to net zero has been a lack of guidance on how to comprehensively reduce their climate impact. There has been no industry standard for what must be done to become a ‘net zero investor’ and no proven pathway to align investments with the scale and pace of transition required. 

The good news is that this has started to change.

A TCFD for Net Zero?

This month TPI marked a key milestone when it was selected by the Institutional Investors Group on Climate Change (IIGCC) as one of the key components of a ‘Net Zero Investment Framework

The ‘Net Zero Investment Framework’ is a major step forward because, for the first time, it gives the wider investment industry, both asset owners and asset managers, a sector-wide framework to define what becoming a ‘net zero investor’ really means. 

Call it a ‘TCFD for Net Zero’ perhaps, the Net Zero Investment Framework (NZIF) provides the first-ever practical blueprint for investors to enable them to maximise the contribution they make in tackling climate change in order to achieve net zero emissions by 2050.  While the willingness has always been there, without a practical roadmap, investors faced a considerable challenge in committing to achieving net zero, risking being left behind as countries, cities, and companies push to achieve the Paris Agreement goals.

To deliver this roadmap, the IIGCC analysed more than 25 methodologies and tools, with those considered to be “best fit” approaches included in the framework. While these tools already existed, the IIGCC has done crucial work in bringing them together and helping investors understand how to use them in a holistic way.

The framework identifies five key components that help define a net zero investment strategy. Specifically, it covers objectives and targets, strategic asset allocation and asset class alignment, alongside policy advocacy, investor engagement activity and governance. It also covers four different asset classes – sovereign bonds, listed equities, credit (corporate fixed income) and real estate. 

In a nutshell, NZIF answers the fundamental and urgent question of what a Paris-aligned portfolio actually looks like, challenging investors to both decarbonise investment portfolios and increase investment in solutions that will achieve the transition to a lower carbon economy. 

For investors, having this framework in place and a pathway for shifting capital from high carbon to low carbon alternatives is a valuable step forward.

Even better, five investors (APG, Brunel, the Church of England Pensions Board, PKA and Phoenix Group) will now put the framework to the test, modelling its impact across the performance of their real-world portfolios which are collectively valued at $1.3 trillion. The results of this analysis will be launched with the final framework, expected before the end of 2020.

While this analysis will provide crucial insights into the framework’s application, we strongly encourage TPI members to contribute to the IIGCC’s consultation before 25 September in order to fine-tune the framework before its full launch. Your feedback is critical to ensuring that the IIGCC’s initiative fulfils its potential in helping investors reach net zero. 

The development of the framework is a big step forward. But now we must ensure that it meets the needs of all investors before completion. 

At TPI, we are thrilled to see our work recognised as one of the key corporate climate action benchmarks. Investors need to play a central role if the world is to limit climate change to below two degrees and we are very proud to be involved in the IIGCC’s Net Zero Investment Framework.

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