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Understanding the Drivers of Investment Portfolio Decarbonisation

A discussion paper on emissions attribution analysis for net-zero investment portfolios

Key points

Members of the UN-convened Net-Zero Asset Owner Alliance (the Alliance), managing more than USD 9.5 trillion, have committed to individually transition their respective investment portfolios to net zero greenhouse gas emissions by 2050. The members’ individual commitments include setting intermediate targets every five years, in line with Article 4.9 of the Paris Agreement schedule and reporting regularly on progress.

Alliance members were the first in the finance industry to set intermediate sub-portfolio decarbonisation targets with the reduction ranges consistent with a maximum temperature rise of 1.5°C above pre-industrial levels (22%–32% by 2025 and 40%–60% by 2030). These ranges were defined in the Alliance’s Target-Setting Protocol; they are based on the best available scientific knowledge and in particular the pathways put forth by the Intergovernmental Panel on Climate Change (IPCC). According to the Alliance’s protocol, these targets can be set on absolute or intensity-based KPIs.

As pension funds and insurance companies, asset owners represent long-term global investors that have a unique role to play in capital allocation towards a low-carbon transition. Alliance members are individually committed to decarbonising their investment portfolios and financing the transition through: capital allocation strategies; engagement with relevant stakeholders; and field building, which refers to contributing to public discourse and pushing for high quality reporting standards. The Alliance believes a combination of these strategies is most effective.

However, measuring the impact of these strategies on real-economy decarbonisation is not always straightforward; in fact, it is particularly challenging to measure the decarbonisation impact of engagement and field building activities. Still, the impact of capital allocation strategies on investment portfolio decarbonisation can be measured and disaggregated.

Within capital allocation strategies for the purpose of decarbonisation, the following sub-strategies can be defined:
1. Strategic asset class re-allocation: for example, shifting towards renewables while concurrently reducing unsustainable exposure in another asset class.
2. Sector re-allocation within one asset class: some sectors are more carbon intensive than others; thus, an asset owner could optimise long-term capital allocation by considering transition financing or by increasing holdings in low-carbon sectors, while simultaneously decreasing exposure to high-emitting sectors.
3. Best in class strategy: includes, for example, overweighting industry leaders in high-emitting sectors (such as steel or cement) that demonstrate superior climate performance (both current and forward-looking) while underweighting climate laggards.

Ultimately, identifying the main decarbonisation drivers supports conversations with the responsible asset and investment managers, who support achievement of decarbonisation targets.

The Alliance concludes that it is not of the highest relevance which model is ultimately applied. However, it is of the highest relevance that net-zero investment teams start to incorporate emissions attribution analysis since it can support achievement of the ultimate climate goals and provide needed transparency. Thus, the Alliance encourages every asset owner and asset manager with a net-zero commitment to endeavour to run its own emissions attribution analysis.