30 March 2022

UNEP - FI: Investor Climate Action Plans & net zero targets: Opportunities for progress in 2022

This blog highlights the need for high-level climate pledges to be accompanied by net zero targets and detailed climate action plans and suggests ways for investors to turn bold pledges into action in 2022.

This year holds great potential for increased ambition of global capital markets to align with the climate change goals of the Paris Agreement. In particular, investors, banks and insurers are now working to align with the IPCC 1.5C scenarios, and the IEA’s Net Zero 2050 scenario for the global energy system. In the lead up to COP26, more than 450 institutions responsible for over $130 trillion of capital committed to transition the global economy to net zero. These net zero pledges were issued via a number of sub-sector net zero investor alliances. PRI and UNEP FI convene a number these alliances including the Net-Zero Asset Owner Alliance (NZAOA), Net-Zero Asset Managers Initiative (NZAM), Net-Zero Insurance Alliance (NZIA), Net-Zero Banking Alliance (NZBA), and the Net Zero Investment Consultants (NZICI).

Investors are now seeking to add credibility to their net zero pledges. This will require portfolio-level targets and climate action plans via robust frameworks such as the NZAOA Target Setting Protocol, the Science-Based Targets Initiative Framework, and others. For investors, the climate action plans tool will be an important reference point. The Investor Climate Action Plans (ICAPs) framework provides a simple planning tool to get started with this process for both investors who have already set net zero pledges and for those who seek to identify ways to operationalise them. It is also useful for investors who still need to create a more systematic approach to climate action before they are ready to set a net zero target.

Turning 2050 targets into near-term investment and capital allocation plans

While implementation is not without hurdles, some members of the net zero alliances are now making their climate pledges real with interim targets and structured climate action plans. A number of institutional investors and banks have committed to bring forward decarbonisation targets to 2030, with the NZAOA setting highly ambitious targets for as early as 2025. Over 100 of the world’s largest asset managers and asset owners have already set and publicly disclosed decarbonisation targets for 2025 or 2030.

Many financial institutions (FIs) are introducing operational changes at their own firms that are required to translate long-term emissions reductions targets into a real economy transition away from fossil fuel-based energy and towards sustainable energy sources. Investors who are leading on net zero are increasingly setting out technical and operational climate action in detailed plans.

Regulators turn up the pressure on net zero targets and climate action plans

More of the global regulatory community is turning its attention to how FIs intend to take action on the voluntary pledges made at COP26. The UK Competition and Markets Authority Green Claims Code and the Financial Conduct Authority (FCA)’s evolving expectations on transition plans for financial institutions indicate that investors need to set targets and publish climate action plans to implement net zero goals. This process will include more near-term targets and the integration of carbon pricing and other climate metrics into existing corporate financial reporting.

While some governments are still catching up with increased investor ambition, ratcheted up NDCs are expected in time for COP27. This should encourage all members of the net zero alliances to turn their bold public pledges into concrete actions. In order to move the global economy towards net zero, investors need to set detailed quantitative, ambitious near-term targets, and publish plans to operationalise these targets.

Steps to operationalise climate pledges

Once targets are set, investors will need to develop implementation plans that involve board-level and executive management strategic planning. Backward-looking analysis will not be adequate to achieve progress on net zero targets. The need for more action-orientated forward-planning will challenge incumbent CFOs, CIOs and executive management teams. Once targets are set, investors will need to develop plans to implement corporate action and asset allocation decisions.

ICAPs Expectations Ladder and business transition planning for net zero

The ICAPs Expectations Ladder and accompanying Guidance document provides investors with clear expectations for issuing and implementing comprehensive climate action plans and quantitative targets across the following key areas: investments, corporate engagement, policy advocacy, investor disclosure and governance.

Climbing the ladder...

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