As the 28th Conference of the Parties (COP28) to the United Nations Framework Convention on Climate Change unfolds, many investors will be paying close attention to clear policy signals that pave the way for the finance sector to strengthen its role in enabling the net zero transition amid challenging external headwinds.
Since last year’s COP27, signatories of the Net Zero Asset Managers (NZAM) initiative have actively contributed to global efforts to limit warming to 1.5 degrees Celsius by continuing to deliver against their voluntary net zero commitments.
NZAM signatories made their individual commitments with the expectation that governments will follow through on their own pledges to ensure the objectives of the Paris Agreement are met. With all eyes on Dubai, it is critical that all efforts are made to create a policy environment which is not only supportive and matches the ambition of investors who have set targets, but enables them to deliver on their net zero commitments.
Energising global finance toward net zero
Since its launch in December 2020, the NZAM initiative has grown to include over 315 asset managers, collectively responsible for more than $57 trillion in AUM. Within just three years, NZAM has become a vital platform for asset managers looking to publicly set and disclose their net zero targets in a comprehensive and consistent manner.
The voluntary initiative represents signatories from all regions of the world and more than half of all professionally managed AUM globally.[1] Over 244 signatories have now disclosed their targets and 193 have reported their progress via the PRI and CDP reporting frameworks. This is in line with the requirement for signatories to disclose targets within one year of becoming a signatory and begin reporting in the first reporting cycle following their initial disclosure.
Integrating climate responsibility into investment practices: a fiduciary duty
Climate change presents material financial risks and opportunities to portfolios of all sizes. Swiss Re[2] predicts a reduction in global GDP ranging from at least 10% up to 18% by mid-century, under a scenario where global average temperatures rise between 2.6 and 3.2°C above pre-industrial levels. Among others, economists from the World Economic Forum,[3] the Network for Greening the Financial System,[4] and the Intergovernmental Panel on Climate Change[5] have voiced deep concerns for the stability of the global economy, predicting substantial economic losses if global emissions persist on their current trajectory.
In this context, signatories have a fiduciary duty to their clients and beneficiaries to preserve the long-term financial value of assets. This involves protecting these assets from the physical and transition risks associated with climate change, thereby ensuring the stability and sustainability of their portfolios.
Broadening methodological horizons to facilitate investor target expansion
Actively managing climate-related financial risks and opportunities is a complex process, and will take time and dedicated research. With net zero frameworks being relatively nascent, there is not yet guidance for all asset classes and investment strategies.
For example, methodologies for the analysis of financed emissions have matured more rapidly in public equity and corporate fixed income compared to sovereign bonds. This is one reason why many signatories include less than 100% of their assets in scope when setting initial targets – this is to be expected and will decrease over time as guidance evolves.[6]
However, progress is being made and just in the last year, guidance for a broader range of asset classes has been released. The Network Partners that deliver NZAM are working hard to support signatories by developing additional investor guidance for the three methodologies endorsed by the initiative. This is exemplified by the impending release of the expanded Net Zero Investment Framework (NZIF) 2.0 in 2024. Currently utilised by over half of signatories, this updated framework will integrate a wider range of asset classes and thematic investment strategies and enable investors to set their individual targets over a greater proportion of their portfolios.
The need for an enabling policy environment
Investors embarking on the journey to net zero cannot navigate the transition alone. The continued progress of the investment community in managing climate-related risk and opportunity depends on action by policymakers and regulators.
In accordance with NZAM Commitment 9, signatories are actively engaged in policy advocacy, pushing for a supportive policy environment that aligns with the goal of achieving global net zero emissions by mid-century. However, many still lack dedicated teams or the capacity to engage in extensive policy advocacy activities. This underscores the need for greater dialogue between investors, governments and other key actors to work towards creating an enabling policy environment that facilitates investors deploying significant capital at the pace and scale required to support governments’ growing responsibilities on climate.
Looking ahead
The journey towards a net zero future is a multi-faceted, multi-decade endeavour. It is a shared responsibility and requires concerted efforts from all stakeholders, including investors, companies, policymakers, and regulators.
The work undertaken by investors will play a central role in steering the industry towards comprehensively accounting for the risk-adjusted implications of climate change in their portfolios. However, this transformative change won’t occur overnight and cannot unfold in isolation. The policy landscape must align with and support these sustained efforts.
The upcoming NZAM Progress Report, slated for publication early next year, will provide a more comprehensive overview, drawing on the initiative’s 2023 reporting season. It will delve deeper into the achievements of signatories, their impact on the financial industry, and ongoing efforts to address the economic implications of the climate crisis.
[1] Based on 2022 data. https://www.bcg.com/publications/2023/the-tide-has-changed-for-asset-managers
[2] https://www.swissre.com/institute/research/topics-and-risk-dialogues/climate-and-natural-catastrophe-risk/expertise-publication-economics-of-climate-change.html
[3] https://www3.weforum.org/docs/WEF_Global_Risks_Report_2023.pdf
[4] https://www.ngfs.net/sites/default/files/medias/documents/conceptual-note-on-short-term-climate-scenarios.pdf
[5] https://www.ipcc.ch/report/ar6/syr/downloads/report/IPCC_AR6_SYR_LongerReport.pdf
[6] Signatories commit to “Review our interim target at least every five years, with a view to ratcheting up the proportion of AUM covered until 100% of assets are included”. NZAM Commitment Statement.