Investor coalition ‘disallows’ use of carbon removals in net-zero protocol

The UN-convened Net-Zero Asset Owner Alliance (NZAOA) has updated its Target Setting Protocol so that it “disallows” members from using carbon-removal schemes to achieve intermediary emission targets.

This is the third edition of the Target Setting Protocol published by the NZAOA, which sets out a pathway to reducing portfolio emissions for the 84 major institutional investors in the $11trn alliance, including Aviva, CDPQ and Dai-ichi Life.

While the first edition of the protocol focused on intermediate target-setting for the year 2025, the second edition outlined the ambition towards 2030. The third version reflects the latest science and expands methodological coverage across asset classes for target-setting.

It requires members to focus in the first instance on encouraging investee companies to prioritise emission reductions and “disallows” the use of carbon removal schemes to achieve intermediary emission targets that detract from these efforts.

This comes as concerns have been raised about the quality of some carbon-removal schemes and criticism of companies that buy carbon credits instead of addressing their carbon footprints.

The NZAOA said: “Alliance members shall not use carbon removals for their own sub-portfolio or sector target achievement at this time or at any time before 2030, when the current protocol comes to term. Alliance members shall encourage investee companies to prioritise abatement.”

Private assets target-setting

The latest protocol also formulates the methodology for direct private equity investments and requires members to commence setting targets in 2023 and cover all new private equity assets by 2025.

Günther Thallinger, board member of Allianz SE and NZAOA, said: “The alliance continues to enhance depth and coverage with each edition of the Target Setting Protocol, aiming to build a coherent, consistent trajectory aligned to the demands of latest climate science.

“We are observing a divergence of real-economy emission pathways and scientific pathways for limiting temperature rise to 1.5°C. With this protocol, the alliance increases expectations for its members and calls on policymakers and corporates to move in line with science.”

Sovereign debt

Under the new protocol, members are asked to phase in target-setting on new commercial real estate loans and, for the first time, includes guidance on carbon accounting for sovereign debt.

The alliance has joined with Partnership for Carbon Accounting Financials and Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) to develop the accounting and assessment standards respectively.

The NZAOA said: “Sovereign debt is a significant asset class for many asset owners and should, therefore, be considered in investment portfolio climate targets.

“Once finalised, the ASCOR project will provide a tool that gives investors a common understanding of sovereign exposure to climate risk and of how governments plan transitions to a low-carbon economy.”

The latest protocol also asks members to consider just transition impacts on their decarbonisation targets, ensuring the benefits of the low-carbon transition are widely and fairly shared.