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Simplifying Net Zero for Asset Managers and Private Equity

By Hannah Morris
24th September 2021

Asset managers and private equity firms are under increasing pressure to set net zero targets and many who have already set targets do not yet know how to achieve them. Recently, we held a webinar with expert speakers from the SBTi and our consultants to demystify the complexity surrounding these targets and share recommendations on how to navigate the requirements and opportunities. The webinar focused on starting points for the financial sector, the frameworks available and some key considerations for preparing the business case. Here’s a summary of the key takeaways from the webinar. You can watch the recording on demand here.

 

Poll#1.1

 

Why should asset managers and private equity consider pledging to Net Zero now?

Achieving global net zero GHG emissions is a requirement for stabilising CO2-induced global warming. In recognising the urgency of keeping global warming to 1.5°C above pre-industrial times, now nearly 70% of the global economy is committed to net-zero by 2050.

The financial industry, through the allocation of capital, holds huge influence over the transition to a low-carbon economy. Recognising this responsibility weighting, many financial institutions are undergoing alignment of their portfolios to this global imperative, while simultaneously getting their own house in order by decarbonising their operations and value chains.

 

All financial institutions are starting out… but don’t get left behind

The recent emergence of several industry guidance documents detailing asset-class specific best practices for portfolio-level carbon accounting and target setting generates technical complexity in this pursuit.

In the chart below, Vanessa presents a timeline of guidance documents that have emerged to provide support to financial institutions on measuring and managing their carbon emissions. From January 2021 we saw a series of guidance documents launched by the Net Zero initiatives of GFANZ (Glasgow Financial Alliance for Net Zero) offering science-based methodologies for achieving net zero targets, specific to particular types of financial institutions. In April 2021, the SBTi issued their guidance for FIs more broadly. Navigating these new guidance documents presents unchartered territory and lessons are being learnt and shared as companies progress through the implementation of them. New tools and sector specific guidance documents are constantly emerging to support the adoption of these methodologies.

 

Vanessa

 

How the financial sector can deliver impact through setting science-based targets

The SBTi framework for financial institutions aims to support FIs in their efforts to address climate change by providing resources for science-based target setting. The framework includes target setting methods, criteria, a target setting tool, and a guidance document. 

The Science Based Targets initiative’s framework allows financial institutions – including banks, investors, insurance companies, pension funds and others – to set science-based targets to align their lending and investment activities with the Paris Agreement. 

FIs’ largest impact on climate change is through their investment and lending activities so it is essential they prioritise target setting in these areas. The SBTi has adopted an asset class–specific approach to enable robust and meaningful targets to be set. After an extended stakeholder engagement process, the SBTi has selected three methods that link financial institutions’ investment and lending portfolios with climate stabilisation pathways, each of which can be used for one or more asset classes:

  • Sectoral Decarbonization Approach (SDA)
  • SBTi Portfolio Coverage Approach
  • The Temperature Rating Approach

Carbon Intelligence has supported 43% of all science-based targets aligned to 1.5°C in the UK. We pride ourselves on pushing our clients to the limits of their ambition and supporting their goals with strategies grounded in reality by using detailed data analysis and scenario modelling. If your company is looking to set your target but requires more guidance, please contact us.

 

Challenges and opportunities for FIs and Net Zero

Net Zero is still an emerging concept for the financial sector with target setting components yet to be defined. There is still no consensus on what a credible net zero target should be, with some philosophical differences around how the finance sector can help deliver real world emission reductions. 

 

Poll #1

 

Not surprisingly, data is perceived as the biggest constraint facing asset managers looking to set robust Net Zero frameworks in place, but it shouldn’t be a deterrent to act now.  We need to trust upcoming regulations (EU Taxonomy, CSRD), engagement improvements (TPI, Climate Action 100+) and software solutions (such as the upcoming Carbon Intelligence platform) to believe that this will improve rapidly in the coming years.  

Cost is also an understandable concern but one that we believe is easily justified by the benefits of setting a coherent Net Zero process. Not least complementing information needed to satisfy the tsunami of ESG-related regulations facing financial institutions. 

However, there are plenty of opportunities for those companies willing to make the commitment. In this section of the webinar, Philip focused on the potential for innovation, notably in analytical techniques, bespoke datasets, asset classes, fund solutions and marketing approaches.  Internal engagement is another big potential opportunity given the need to educate and inform a workforce about emissions reductions, with huge benefits to be had in employee productivity and retention. For more details, you can watch the recording on demand here.

 

How can Carbon Intelligence help?

Navigating multiple target frameworks and deciphering target jargon to ensure a credible, pragmatic decarbonisation strategy for your portfolio composition, operations and business imperatives, is uncharted territory for all, with no retrofit solution. In this complex landscape the team at Carbon Intelligence can help you choose the right approach that incorporates your asset class mix and sector exposure to position you well within your peer group and ensure credibility 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 ambition, capacity and resource.  

We are trialling a next generation platform to solve the data challenge. Contact us today to learn more.