What levers do asset owners have to mitigate climate change?
The latest IPCC report emphasises each fraction of degree of global warming brings a new level of damage to the society and the environment, and the financial sector of course has a key role in mitigating it.
The new target-setting protocol of the Net Zero Asset Owners' Alliance (NZAOA) lays out the challenges and solutions for asset owners to pursue a 1.5°C trajectory ahead of government policy and societal behaviour.
The authors of the protocol stress how AO's fiduciary duty can get in the way of this aspiration and provide guidance to manage both:
- As the economy is drifting away from a 1.5°C future, the Alliance tolerates pathways with a low overshoot as long as they are properly justified.
- Setting portfolio-level emission targets is recommended, but rather as a means for efficient engagement and capital allocation rather than an end in itself.
- The document develops detailed methodologies to set targets, calling for productivity targets (emissions per unit of output) rather than financial intensity target (emissions per unit of revenue) to support engagement and decision-making.
- Alliance members are encouraged to take part in the creation of robust carbon markets, although carbon offsets are not accepted to meet their own emission targets.
- Engagement and lobbying are very much put forward with specific and quantitative goals, showing no emission reduction plan can hope to have real-world effects without working closely with other economic and political actors.
- On the opposite, divestment and exclusion are not incentivised as they would just support superficial 1.5°C alignment strategies that would achieve no concrete mitigation results.
This Protocol still leaves some room for AOs to adapt their targets to their specific situation, as the problem at hand is too complex for a one-size-fits-all solution. While it lowers the comparability of the Alliance members' disclosure, it is still a great guide for good-faith investors to build their case for a more responsible management strategy.