$11trn investor coalition bans carbon removals in latest net-zero framework

More than 80 major investors, including Aviva, CDPQ, and Dai-ichi Life, are members of the Alliance

The UN-backed Alliance has unveiled the third iteration of its Target-Setting Protocol, which will act as guidance for investors and asset owners to create frameworks and action plans to reduce carbon emissions across the portfolios they manage.

More than 80 major investors, including Aviva, CDPQ, and Dai-ichi Life, are members of the Alliance and will incorporate the Protocol’s methodology to help reduce emissions across portfolios, private equity investments, sovereign debt and real estate loans.

With investment portfolio emissions usually accounting for the majority of asset owner emissions, the new Protocol will align sub-portfolio targets with research based on the Intergovernmental Panel on Climate Change’s (IPCC) most recent pathways.

Indeed, the NZAOA is stating that emissions from sub-portfolios should be reduced by 22% to 35% by 2025 and by 40% to 60% by 2030. Members will be required to set targets this year for direct private equity investments and cover all new private equity assets by 2025.

The latest version of the Protocol fleshes out key details around the just transition and the use and financing of carbon removal technologies.

On the just transition, a pre-existing Alliance Commitment requires members to consider the societal impacts that shifting portfolios to a low-carbon economy will generate. The new Protocol asks members to consider how the benefits of the low-carbon transition can be shared but also the risks that this shift can bring for some carbon-intensive industries and communities.

Members have been asked to focus on climate solution investments in emerging markets, which traditionally have fewer resources to transition away from fossil fuel dependence and are likely to be the most vulnerable communities when it comes to climate impacts.

The second key area, that of carbon removals, has also been updated in the latest Protocol. The NZAOA’s Net in Net-Zero paper stated that members should prioritise emissions reductions over carbon removals. The Protocol has “disallowed” the use of carbon removals to achieve short-term reduction targets.

Alliance member Günther Thallinger said: “The Alliance continues to enhance depth and coverage with each edition of the Target Setting Protocol, aiming to build a coherent, consistent trajectory aligned to the demands of latest climate science.

“We show that working towards net zero is possible. It is a matter to decide to do so. We are observing a divergence of real-economy emission pathways and scientific pathways for limiting temperature rise to 1.5C. With this Protocol the Alliance increases expectations for its members and calls on policymakers and corporates to move in line with science.”

1.5C alignment

A progress update from the Alliance, published in September 2022, found that 44 of its members had set 2025 targets to decrease their financed emissions. These targets are badged as aligned with a 1.5C temperature pathway.

The report also confirmed that investors collectively managing $3.3trn had set sub-portfolio emissions targets for 2030 or sooner, up from $1.5trn in 2021.

The latest Protocol includes guidance, for the first time, on carbon accounting for sovereign debt. The NZAOA notes that sovereign debt is a “significant asset class” for many members. The Alliance is working with the Partnership for Carbon Accounting Financials (PCAF) and the Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) to develop the relevant standards moving forward.

Additionally, Alliance members have been tasked with phasing in target setting for new commercial real estate loans. Members will utilise the Carbon Risk Real Estate Monitor (CRREM) 1.5C national pathways or will align to IPCC ranges. Members will have to disclose and report the share of the portfolio that is covered by these targets on new investments from 2024.