Capital markets fight climate change
It also clarifies climate change scenarios to guide members in setting goals. Specifically, there are three areas of advancement. First, the Protocol has expanded: infrastructure – equity and debt – is now covered, and the first steps towards sovereign debt are included. This is proof of the desire to advance the Protocol each year by adding additional asset classes.
Second, this version sets new climate targets aligned with the latest IPCC report. The first edition covered 2020 to 2025 and recommended emission reductions of 16% to 29%. This edition highlights that the reductions for 2020 to 2030 should be between 49% and 65%. It also outlines more ambitious reduction ranges of 22-32% by 2025. This shows a step change in aspiration on the part of the AOA.
Third, the protocol describes more granular metrics and approaches for asset classes already in scope. For example, the protocol lists our demands to companies and asset managers in climate-related commitments. The focus is on portfolio emissions, known as scope 3 emissions, which typically represent the majority of an asset owner’s emissions (95-97%) in their portfolios, so the inclusion is extremely helpful for members.
One concern is with the definition of net-zero. Critics say there’s no full definition yet, so there’s plenty of wiggle room for companies to cut corners on how they handle emissions.
Race to zero did a great job describing what net zero means in terms of 1.5°C. Within the Alliance, we use this to detail our definition, which, as mentioned, is that net zero means a crucial transition to a pathway to keep global temperature rise to 1.5°C.
Alliance members modify their investment decision-making based on this, enabling them to work effectively with others on transformation. With science-based short-term targets for portfolio emission reductions; reductions in the sector’s emissions intensity; corporate commitment; and funding for the transition, as well as neutral monitoring of the goals established in the form of a UN-led secretariat, we have taken significant first steps. However, if organizations or companies pledge to reach net zero by 2050 without providing details, yes, then the pledges may not mean much.
Action on climate change surely means that there are no new oil projects and that coal must be phased out. At COP26, governments agreed on a global phase-out of coal. How does the Alliance position itself vis-à-vis fossil fuels?
Alliance targets should be set on science-based no and low overshoot trajectories that are clear on fossil fuel related trajectories. This includes several technological eliminations, certainly including coal. In addition, the Alliance has an explicit commitment Position on coal phase-out, which members are adopting, a process that is underway and which the Alliance will accelerate.
From an investment perspective, it is important to start building the infrastructure needed for a carbon-neutral economy. the IEA net zero report shows the reduction in oil and gas demand needed over the next 30 years. This can only be achieved through political action that balances economic and climate needs with the social well-being of people around the world. There is no need for new oil-related infrastructure in these scenarios, and the TSP takes this into account.
At AOA, we work together because we believe in moving to a greener economy. The AOA believes that a viable and just transition must be ensured as it will involve significant disruption, and we must bear in mind the human cost. We also realize that there are opportunities for long-term investors arising from this transformation and we want to work with governments on long-term plans to guide a transition.
Can we discuss voting rights? The Sunrise Project said that while AOA members are committed to carbon neutrality, they are not pushing polluting companies to decarbonize. In particular, they oppose the pro-commitment discourse of members with their climate voting practices. Joining the Alliance does not improve members’ voting results. Is this a fair criticism?
It was a good analysis which highlights the role NGOs can play. Voting is an integral part of stewardship, and we have published proxy voting guidelines to guide members in engaging their asset managers in their voting programs. But it is not always a simple process that can be considered in a binary way. Each asset owner and asset manager should evaluate a proposal based on their interpretation of how it aligns with their net zero commitment.
It should also be remembered that the first version of the TSP was only released last year. This year’s memorandum calls on asset managers to publicly commit to supporting the transition and committing all of their portfolios to 1.5°C and net zero alignment by 2050. The Alliance has also various engagement approaches, with the protocol including a list of climate-related actions requests from managers such as publishing their approach to integrating climate risks and opportunities. However, if Project Sunrise conducts a similar analysis over three years and arrives at the same results, we have a problem.
Regarding the future of the AOA, what are the objectives? At the start of 2021, there were 33 institutional investors representing $5.1 trillion in assets under management. It is now $70 and $10.4 trillion, respectively. However, if you look at the list of members, there are only four members based in the United States, for example.
We continue to work on recruitment and while we don’t have a growth target, 100 would be a nice number to have by the end of 2022. We are interested in covering all regions and countries including the United States. United and China. In particular, we have ongoing discussions with sovereign wealth funds.
We want more members not only because of the influence that the increase of the AuM brings. It is also thanks to the expertise that each new member brings – which is extremely valuable. Everything we have just discussed, the TSP, the backgrounds, the commitments and the dedication comes from the initiative and the dynamism of our members and their experts. We have developed world-class concepts because we have world-class experts in our ranks. And that’s why we continue to welcome new members – because they improve and refine our approach and continue to build momentum for bold climate action plans.
But the reach and influence of the AOA goes far beyond its members. The TSP is the gold standard for how a group of like-minded organizations can set standards on climate ambition – not only for financial institutions but also for companies operating in high-emissions sectors. Insurance companies and pension funds, our main member groups, lead by example and others follow.
