The 2016 Paris Agreement makes it imperative for investors to plan their journey to net zero.
A number of frameworks exist to help asset owners and managers reach net zero, providing guidelines on decarbonizing portfolios, increasing investments in climate solutions and green technologies, and improving reporting. For asset owners, the most important step is likely to be Portfolio Construction.
Let’s walk this road together and discover how to undertake your Journey to Net Zero.
The types of target you'll set will depend on your book of business or capital pool and targets should be set in line with science-based pathways that align with achieving net zero global emissions by 2050 or sooner.
Come back soon to see how we implemented this on our own path to become a net zero asset manager.
Asset class alignment is a key factor for aligning your investment to appropriate net zero pathways within each asset class.
There are 4 key elements in this critical part of implementation.
There are a number of potential steps that investors may take here, including positively weighting towards good alignment-criteria performers for existing assets, applying screening criteria for new active assets, using the right indexes or solutions, as well as allocating to green bonds etc. There are many effective new ways to construct your portfolio to meet your goals.
State Street Global Advisors offers a range of investment strategies that may tie in with your vision, mission and investment goals. Some approaches to consider:
Engagement and stewardship actions are recommended as the main tool to achieve alignment. However, divestment and exclusion may be considered where there is climate-related financial risk; to escalate after unsuccessful engagement or where the company's primary activity is no longer considered permissable in terms of credible net zero pathways.
Relevant reporting can help investors meet regulatory and reporting obligations to beneficiaries, trustees and other stakeholders. Our climate reporting solutions are designed to help clients understand how their strategies perform against their investment objectives, including climate-focused objectives.
Come back soon to discover more about our ESG reporting and how it can help you on the path to net zero.
Investors should consider whether their policy advocacy supports policy and regulation supportive of net zero alignment, and encourage their asset managers to provide strategies and products that help them meet their alignment goals.
You should also plan to inform your stakeholders of the actions that you’ve taken along your journey to net zero.
‘Net zero’ means that the total greenhouse gas (GHG) emissions being emitted should be lower than or equal to the total GHG emissions being removed or absorbed. On a net basis, no additional emissions should be released into the Earth’s atmosphere.
Scientific models that target a temperature rise of less than 1.5°C over and above pre-industrial levels show that we need to achieve net-zero emissions by the year 2050.
In October 2016, the European Union formally ratified the Paris Agreement, which aims to strengthen the response to climate change, among other means by making investment flows consistent with a pathway towards low GHG emissions and climate-resilient development. To comply with the Paris Agreement goals, countries need to achieve net zero emissions by 2050.
There have been a number of Net Zero Initiatives and Net Zero Frameworks released in recent years, including a variety of EU regulations, the Paris Aligned Investment Initiative (PAII) by the IIGCC, the Net Zero Asset Manager Initiative (NZAMI) and the Net Zero Asset Owner Alliance (NZAOA).
The focus of these initiatives are broadly the same. They tend to focus on decarbonization, increasing investment in climate solutions and green technologies, and achieving better reporting.
The IIGGCC along with four regional investor networks has proposed a framework for asset owners. The Paris Aligned Investment Initiative (PAII) from the Institutional Investors Group on Climate Change (IIGCC) is an initiative involving over 110 investors and $33 trillion in assets. The IIGCC released their Net Zero Investment Framework in March 2021.
The Framework is intended to be adopted by asset owners or asset managers following a formal commitment. Initially, the framework covers four major asset classes — sovereign bonds, listed equities, corporate fixed income and real estate, with others to follow.
All net-zero frameworks pull on the same levers to varying extents to drive change in portfolio companies, but the IIGCC Framework is highly regarded and vetted by industry participants. It provides somewhat flexible guidelines to investors, along with recommended actions, metrics and methodologies to achieve the goal of net zero global emissions by 2050 or sooner.
The returns on a portfolio of securities which exclude companies that do not meet the portfolio's specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio's ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.
Responsible-Factor (R Factor) scoring is designed by State Street to reflect certain ESG characteristics and does not represent investment performance. Results generated out of the scoring model is based on sustainability and corporate governance dimensions of a scored entity.
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