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Net Zero Targets

Net Zero Target Setting

The background:

Pension funds, insurers, asset managers and companies are increasingly under pressure to set net zero targets; to not add to greenhouse gas emissions, typically by 2050, with some variation. Easier to abate sectors can and should set net zero targets before 2050.

To limit warming to 1.5 degrees by 2100 as set out in the Paris Climate Agreement – we need net zero greenhouse gas emissions by 2050 and to have halved emissions by 2030 (based on 2019 levels).

External validation:

The quality of net zero targets varies, which is why net zero targets are increasingly subject to external validation. The best known organisation validating targets is SBTi, the Science Based Targets initiative.

SBTi is a collaboration between CDP, the UN Global Compact, the World Resources Institute, and the World Wildlife Fund. SBTi works to help businesses, including investors, set emission reduction targets that are aligned with climate science.

There are over 200 financial institutions with SBTi-approved targets, including Blackrock, HSBC and State Street Global Advisors.

However, while the results are public (whether the target is SBTi approved), the detailed assessment of a target is not (in the words of SBTi, in order to protect the company’s confidential information)

While SBTi has helped enhance the quality of net zero targets, criticism of SBTi falls into the following categories:

  • Lack of transparency, making it difficult to assess quality.
  • Ambition of targets.
  • Focus on emissions, while not, for example, incorporating biodiversity.
  • Complexity, particularly for SMEs (although, this appears to contradict the first three critiques).
  • And for investors, there’s another challenge: the initiative is not specific to investors.
 

Nevertheless, SBTi has published a free-to-use target setting tool, which helps understand decarbonisation pathways, and is worth reviewing.

Paris Aligned Investment Initiative:

For investors, there are a range of other initiatives that provide detailed guidance, such as the Paris Aligned Investment Initiative.

The PAII’s Net Zero Investment Framework (NZIF) Implementation Guide sets out how to implement net zero investment strategies in investment portfolios, with guidance on the following key areas:

  • Governance
  • Targets
  • Strategic asset allocation
  • Portfolio decarbonisation
  • Engagement with investee companies
  • Reporting and transparency
 
The Net Zero Investment Framework maturity scale (page 17) is an important tool to assess company and portfolio target setting (no action taken, starting to take action, taking action but not yet aligned, and aligned).

 

Other guides, underpinning targets with transition planning, include:

1. Net-Zero Asset Owner Alliance’s Target Setting Protocol (TSP) 

The TSP is a framework for asset owners to set ambitious and achievable net zero targets, including:

  • Setting a baseline year and understanding the current emissions of the investment portfolio.
  • Selecting a net zero target pathway, which is a trajectory for reducing emissions to net zero by 2050.
  • Setting interim targets for the years 2025 and 2030.
  • Developing a plan to achieve the targets.
  • Monitoring and reporting on progress.

 

2. The Net Zero Transition Plan Framework 

The Net Zero Transition Plan Framework is a six-step process published by GFANZ:

  • Commit to net zero: The financial institution must make a public commitment to achieving net zero greenhouse gas emissions by 2050.
  • Set interim targets: The financial institution must set interim targets for reducing emissions in the short-term (e.g., by 2025 and 2030).
  • Develop a transition plan: The financial institution must develop a plan for how it will achieve its net zero and interim targets. This plan should include specific actions that the financial institution will take to reduce the emissions of its portfolio companies and its own operations.
  • Implement the transition plan: The financial institution must implement the transition plan and track its progress towards its targets.
  • Disclose progress: The financial institution must disclose its progress towards its net zero and interim targets on a regular basis. This disclosure should be transparent and comprehensive.
  • Hold oneself accountable: The financial institution must hold itself accountable for achieving its net zero and interim targets. This may involve establishing internal governance structures, engaging with stakeholders, and seeking external assurance.

 

3. The Transition Plan Taskforce (TPT)

The TPT Disclosure Framework is a sector-neutral framework that provides recommendations for companies and financial institutions to develop gold-standard transition plans. The Framework is based around five elements:

  • Foundations: covering strategic ambition, business model and value chain, and key assumptions and external factors
  • Implementation strategy
  • Engagement strategy
  • Metrics and targets
  • Governance

 

In addition:

The PRI transparency reports for 2023, which includes GHG emissions data, are expected to be published in late 2023 (although this is an estimate). Net Zero Asset Managers (NZAM) initiative signatories must disclose their emissions, either via PRI or CDP. As of October 2023, there are more than 315 signatories representing over USD 64 trillion in assets under management.

SFDR Principal Adverse Indicator disclosures also include GHG emissions.

For the UK market, research by Hymans Robertson in March 2023 assessed insurer net zero targets, the date (2040, 2045 or 2050), the metric (sales, revenue or invested), the emissions (Scope 1 and 2, or 1, 2 and 3), and the asset classes.

Best-in-class target setting

At Canbury, we’re exploring the characteristics of best-in-class investor net zero target setting. Here’s our ten-point plan:

  1. The target itself, whether the target includes current GHG emissions, interim targets, for example, by 2025 and 2030, and sub-targets, for example, by strategy, asset class and sector, potentially supported by scenario analysis. The target should be underpinned by metrics, for example, the GHG emissions per unit of sales, revenues or enterprise value.
  2. Governance, whether the target is supported and overseen by the investor’s senior management or board, and, potentially, whether the target is linked to remuneration, approach to training, and the staff responsible for day-to-day implementation, underpinned by TCFD reporting.
  3. Transition planning, including the steps the investor has taken and will take to meet the target, with examples, following the TPT framework (see above). 
  4. Approach to trade-offs, for example, profitable companies operating outside of Paris-aligned carbon budgets, as well as details on energy companies’ cap-ex planning, dividend engagement (being prepared to reinvest dividends in transition, rather than return to shareholders), or managed wind down (where companies are unable to transition by nature of their industry or geography). One way to assess potential future trade-offs is to assume a nominal carbon price (for example, £100 of CO2 per ton) to determine a company’s transition risk and action the investor would then take.
  5. The investor’s position on divestment, in particular on the most polluting fossil fuels, such as thermal coal, tar sands oil, oil shale, heavy crude oil and lignite coal, as well position on new fossil fuel projects.
  6. The investor’s investment in environmental solutions, including nature-based solutions, carbon sequestration, and how target setting links to sustainability themes, including nature, biodiversity and just transition. This could include a green alignment indicator (underpinned by EU Taxonomy data, green revenues and green capital expenditure data, as well as broader ‘impact’ or SDG alignment. This could also include the investor’s position on use of offsets (which should only be in exceptional circumstances as a last resort).
  7. Stewardship strategy, including participation in collaborative initiatives in both supply of fossil fuels, and demand, use of voting rights and shareholder resolutions, and other escalation measures, and hard-to-abate sectors, including agriculture and buildings.
  8. The investor’s approach to climate lobbying, policy and regulatory engagement, membership of investor groups, and the investor groups’ alignment with net zero targets.
  9. Transparency, as well as the investor’s approach to reporting and engagement with (and if necessary, education and training for) clients.
  10. And finally, external validation, whether the target has been reviewed by a third-party.

In the coming weeks, we will further develop our guidance and training materials on asset manager target setting. 

To discuss further, email info@canbury.io.

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