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How to Target Net Zero in an Investment Portfolio

By Vanessa Sheehan
27th July 2021

The many paths to portfolio decarbonisation

In this article we help you navigate the complexity of the evolving voluntary and regulatory portfolio carbon footprinting landscape.

The impact and influence of Financial Institutions (FIs) portfolio greenhouse gas (GHG) emissions on the climate is under increasing scrutiny, with increasing numbers of disclosures, commitments and frameworks available to satisfy the new levels of interest.

 

Mandatory Disclosures
Forthcoming regulations are imposing transparency and disclosure requirements on FIs who need to prepare for mandatory reporting on the climate risks and carbon emissions associated with their investment and lending activities through two key reporting frameworks – the Task Force on Climate-Related Financial Disclosure (TCFD) and the Sustainable Finance Disclosure Regulation (SFDR).

Net Zero Commitments
An increasing number of Fls are announcing Net Zero by 2050 commitments and ambitious shorter-term targets on their operations and their portfolios, as well as becoming signatories to industry alliances such as the Net Zero Asset Managers Initiative (NZAMI) for asset managers and the Initiative Climat International (ICI) for private equity firms. These alliances are leading the charge on climate action from within the sector. The NZAMI for example, represents an international group of asset managers (currently 128 signatories) with $43 trillion AUM, who are committed to supporting the goal of net zero GHG emissions by 2050 or sooner, in line with global efforts to limit warming to 1.5 degrees celsius.

Industry Frameworks
In the last eight months the industry has seen the burgeoning of keystone industry guidance frameworks that provide FI’s with best practice methodologies for portfolio GHG accounting and target setting. These guidance notes include the Partnership for Carbon Accounting Financials (PCAF) Global GHG accounting and reporting standard for the financial industry, The Science-Based Targets Initiative’s (SBTi) financial sector science-based targets guidance, and the Net Zero Investment Framework 1.5oC Implementation Guide, to mention a few. But with all of these frameworks coming into play, finding the right one for your business can become challenging.

 

The methodologies prescribed by the various frameworks are tailored to different asset classes, have sector-specific considerations, and are applicable to different FIs. As such, these frameworks can complement one another in their use, they can overlap or build upon one another, and in certain instances they can even diverge from one another.

This can present a challenge to FIs when it comes to determining which methodology to deploy as, in short, there are several ways that a FI can target Net Zero in an investment portfolio. This can leave ESG Heads or Portfolio/Fund managers with lots of complexity to grapple with when looking to incorporate carbon accounting and target setting methodologies into investment strategies.

Beyond the choice of which framework(s) to adopt (and to what extent they are applicable to your asset class mix), the wider voluntary and regulatory landscape of portfolio emissions measurement and decarbonisation is constantly and rapidly evolving.

 

Additional ‘best practice’ factors to consider

Newly formed industry alliances and initiatives are emerging which offer the industry their own best practice on more specific topics such as practices and tools for ‘scenario analysis’ (such as the 2dii Paris Agreement Capital Transition Assessment (PACTA) or ‘enabling action’ (such as the Climate Action 100+).

Sector-specific guidance is also emerging, prescribing distinct tools or metrics for use in GHG accounting and Net Zero pathway setting (e.g. the Carbon Risk Real Estate Monitor (CRREM) and the Industry Guidance note for setting SBTs in the Aviation and Shipping Industry which SBTi are currently developing).

Defining a credible decarbonisation strategy is crucial. By basing targets and portfolio insights on best practice guidance and the latest science, FIs can evidence rigorous and accurate approaches in both their public disclosures and their actions.

 

Find the right approach appropriate for your company

It’s a complex landscape to navigate and Ci can help you choose the right approach that incorporates your asset class mix, sector exposure, positions you well within your peer group and is credible in front of investor and public market scrutiny.

Our services simplify the complex to generate meaningful insights that reveal your portfolio carbon exposure and potential for climate impact. We translate insights into a single roadmap of pragmatic action against materiality and aligned to a pace that matches your decarbonisation appetite, capacity and resource. Contact us today to learn more.

 

Further resources

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