The Institutional Investors Group on Climate Change (IIGCC), a European body for investor collaboration on climate change, announced the launch of his Net Zero Commitment Initiative (NZEI). One of the main aims of the initiative is to “help investors align more of their investment portfolio with the goals of the Paris Agreement” while increasing the number of companies subject to the investor engagement on climate change. While Climate Action 100+of which the IIGCC is a coordinating member, “transformed the scale and importance of climate engagement with 166 targeted high-emitting companies, many more companies need to be engaged to align portfolios to net zero,” said said the IIGCC.
At the end of March 2023, 93 investors have agreed to participate in NZEI, including Allianz, BNP Paribas, the Church of England Pensions Board and Schroders. 107 companies in a wide range of industries have letters received asking for confirmation that companies have developed, or intend to develop, a net zero transition plan, which “provides a key tool for understanding the alignment of investment portfolios”. The letters state that “plans should set out both a company’s emissions targets and a strategy for how it intends to achieve them. Recognizing that most companies will not be able to achieve net zero on their own, they should also indicate how they intend to support the transition more broadly.
The letters articulate the investment predicate for the NZEI as “recognizing the financial risk presented by climate change and the future regulatory risks posed by companies’ failure to prepare for economic transition”. As a result, according to the letters, “many investors have pledged to work towards aligning portfolios with net zero emissions through initiatives such as Paris Aligned Asset Owners and Net Zero Asset Managers Initiative. To date, more than 350 investors in these two initiatives, with more than $60 trillion in assets under management, have pledged to work towards achieving net zero emissions in their portfolios.
The letters recommend the adoption of four key components of the plan that align with the Net Zero Investment Framework business criteria:
- a global net zero commitment by 2050 or earlier, “covering all relevant business areas and all greenhouse gas (GHG) emissions scopes (1, 2 and 3);”
- short, medium and long-term GHG targets “aligned with the relevant emission trajectory and compatible with limiting the global temperature increase to 1.5 degrees Celsius”;
- disclosure of emissions performance specifying scopes 1, 2 and 3; And
- a credible decarbonization strategy which should include “key actions you will take to meet GHG emissions targets, including defining plans for capital expenditures and investments in climate solutions, as appropriate”.
To support confirmation requests, March 15 IIGCC published a guide“Investor Expectations of Corporate Transition Plans: From A to Zero”, which provides information on evaluating transition plans, justifying requests, and guidance on how companies can respond to requests.
Taking the temperature: Expanding beyond the companies committed to Climate Action 100+, the IIGCC seeks to help investors align a greater percentage of their portfolios with benchmarks consistent with Paris Agreement goals . The IIGCC is aligned with commitments made by other industry groups focused on net zero, such as the Paris Aligned Asset Owners (PAAO) And Net Zero Asset Managers (NZAM). While investor-led corporate climate engagement appears strong, these initiatives have also been subject to controversy and challenges. As we reported in December 2022, Vanguard, one of the “big three” asset managers (along with Blackrock and State Street), has withdrawn from NZAM membership. This withdrawal follows critical minority staff of the US Senate Committee on Banking, Housing, and Urban Affairs on the “liberal views” toward ESG of the “big three” asset managers. Similarly, Munich Re, Zurich and Hannover Re, three large insurers, announced its release from the Net-Zero Insurance Alliance in the space of a month between March and April 2023, with at least one citing antitrust risk as a motivating factor.
As for Climate Action 100+, we discussed recently its announcement of Benchmark 2.0, an assessment tool to assess the efforts of 166 targeted companies to achieve a net zero transition against three goals: take action to reduce emissions; implementing strong corporate governance and accountability for climate-related risks; and improving climate-related financial information. The organization has also come under scrutiny from Congress, as we reported on a letter written by Republican members of the House Judiciary Committee to members of the Climate Action 100+ steering committee saying the investor-led initiative created “appears to be operating like a cartel.” House Republicans said they have launched an investigation “to determine whether the major climate groups leading the (ESG) movement are violating antitrust laws.”
Net zero transition plans have also exposed companies to intense scrutiny. We recently reported on a study finding that only 5% of FTSE 100 companies have disclosed credible and sufficiently detailed transition plans to become net zero by 2050; our report and other posts also commented on shareholder pressure on companies to adopt, disclose and meet net zero transition goals. At the same time there is increase the attention of shareholders and regulators getting paid to find out if companies that have disclosed net zero plans are on track to meet those goals, exposing those companies to potential greenwashing challenges.