Climate and net zero frameworks: know your CDPs from your TCFDs

Some of the most important climate-related financial initiatives – including their focus and what they seek to achieve

10-05-2022

Climate change is one of the greatest challenges facing humanity. It is also a phenomenally complex problem.

In the quest to solve it, firms try to drive change guided by a plethora of frameworks and initiatives. The financial sector is no exception.

The burgeoning number of such frameworks can be off-putting, especially when coupled with excess use of acronyms. There is a risk of confusion around what each framework seeks to achieve, as well as duplication.

As one of the first and largest investment houses to have our climate targets validated by the Science Based Targets initiative (SBTi), we have become acquainted with a number of these initiatives.

Understanding them, their origins and objectives is critical in making effective strategic decisions over how to get to net zero.  

The purpose of this guide is to provide insight into some of the key climate and net zero frameworks. These are outlined in Table 1; treat it as a cheat sheet for future reference.

To help navigate the document, some of the frameworks are mapped to the four steps we use when engaging with our portfolio companies and clients on their approach to reaching net zero:

  1. Establish a commitment – Both1 and 2 in the table below work together to encourage net zero commitments across the investment management industry.
  2. Choose a framework for measurement – 3 and 4 are key for target-setting.
  3. Publish an action plan – 4 can also be used to consider how to integrate a net zero commitment into investment and corporate strategy.
  4. Track and report progress – 6 primarily focuses on the reporting of climate risks and opportunities, but provides a useful platform for reporting progress on net zero targets. Though not publicly available, 7 is a key platform for disclosing climate and net zero strategy.
606051_Webchart-netzero-breakdown

Climate and net zero organisations

1. UNEP FI: Net Zero Asset Owners Alliance (NZAOA)

Topic: net zero

Type: commitment

Sector focus: Asset Owners

Signatories/ supporting organisations: 74 institutional investors

Geographic footprint: global

Purpose: to drive the development of industry best practice around net zero through its integration into its members’ investment mandates.

Summary: Established in early 2019, the UN-convened alliance brings together some of the largest Asset Owners globally to promote the strategic alignment of capital to support and enable the net zero transition. The second edition of its four-part target-setting protocol introduced the absolute emissions reductions requirements for 2025 and 2030, and aims to steer members to reach their net zero commitments through:

  1. Engagement targets: including direct engagement with underlying holdings, and contribution to Asset Manager-led engagements;
  2. Sector targets: sector specific KPIs with a focus on intensity/absolute targets, including Scope 3 emissions where possible;
  3. Sub-portfolio emissions targets: asset class specific KPIs with a focus on intensity/absolute targets, including Scope 3 emissions where possible, and;
  4. Financing transition targets: focused on driving increased transparency in climate reporting.

Though currently focused on corporate targets, the protocol is going through an improvement to include sovereign debt as an asset class.

Insight:

  • The setting of absolute/intensity-based emissions targets has had greater uptake by Asset Owners with balance sheet assets than those with a fiduciary duty over member assets
  • Signing up requires membership to the UN’s Principle for Responsible Investment (PRI)

Weblink: UN-convened Net-Zero Asset Owner Alliance – United Nations Environment – Finance Initiative (unepfi.org)

2. Net Zero Asset Managers Initiative (NZAMI)

Topic: net zero

Type: commitment

Sector focus: Asset Managers

Signatories/ supporting organisations: 273 asset managers

Geographic footprint: global

Purpose: to support the investment industry in reaching the goal of net zero greenhouse gas emissions by 2050 or sooner.

Summary: established in 2020 following the launch of the NZAOA (see above), NZAMI provides a consistent approach for investment managers to establish a net zero commitment. Signatories are accountable for the delivery of three commitments:

  1. “Work in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net zero emissions by 2050 or sooner across all assets under management (‘AUM’)
  2. Set an interim target for the proportion of assets to be managed in line with the attainment of net zero emissions by 2050 or sooner
  3. Review our interim target at least every five years, with a view to ratcheting up the proportion of AUM covered until 100% of assets are included”

These are underpinned by 10 objectives, ranging from the establishment of an interim 2030 target, to providing the necessary data and analytics to asset owner clients, and reporting in-line with the TCFD.

Insight: NZAMI also provides investment managers with a platform for collaborative engagement with portfolio companies. It is not as prescriptive as the NZAOA in its target-setting requirements since it does not mandate a percentage reduction in portfolio emissions.

Weblink: The Net Zero Asset Managers initiative – An international group of asset managers committed to supporting the goal of net zero greenhouse gas emissions

3. Science Based Targets initiative (SBTi)

Topic: net zero

Type: target setting protocol

Sector focus: sector specific (specific guidance for different sectors)

Signatories/ supporting organisations: 3526 companies taking action

Geographic footprint: global

Purpose: to provide a consistent approach to the setting of emissions reductions and net zero targets in line with climate science.

Summary: the SBTi is a partnership between CDP, the United Nations Global Company (UNGC), the World Resources Initiative (WRI) and the World Wide Fund for Nature (WWF). It provides sector-specific methodologies and guidance for setting science-based targets that show organisations how quickly they need to reduce their GHG emissions in order to reach net zero by 2050. Targets are deemed to be ‘science-based’ if they are align with what the latest climate science deems necessary to meet the goals of the Paris Agreement. The setting of a science-based target involves a 5-step process:

  1. Commit: submit a letter establishing the intent to set a science-based target
  2. Develop: work on an emissions reduction target in line with the SBTi’s criteria
  3. Submit: present the target to the SBTi for official validation
  4. Communicate: announce the target and inform stakeholders
  5. Disclose: report company-wide emissions and track target progress annually

The inclusion of validation provides comfort to investors on the reliability of the established target.

Insight:

  • Establishing the net zero trajectory is the easy part. The real challenge is collecting the data to accurately calculate the portfolio emissions baseline.
  • It is also important to consider that offsets are not permitted as part of the target setting methodology. Organisations are only permitted to use offsets against the final 10% of emissions in cases where they cannot be removed from operations.

Weblink: Ambitious corporate climate action - Science Based Targets

4. The Institutional Investors Group on Climate Change (IIGCC): Net Zero Investment Framework (NZIF)

Topic: net zero

Type: framework

Sector focus: Asset Managers and Asset Owners

Signatories/ supporting organisations: 60 Asset Owners committed, 55% of NZAMI signatories use NZIF*

Geographic footprint: European, though moving global

Purpose: ensure investors can decarbonise investment portfolios and increase investment in climate solutions, in a way that is consistent with a 1.5°C net zero emissions future.

Summary: Developed by the Paris Aligned Investment Initiative (PAII), a collaboration of investor networks, the NZIF aims to support investors in maximising their contribution to real-world emissions reductions. The framework focuses on 6 key areas to provide investors with a holistic approach to the integration of net zero strategy into their business models:

  1. Governance and strategy;
  2. Targets and objectives;
  3. Strategic asset allocation;
  4. Asset class alignment;
  5. Policy advocacy, and;
  6. Marketing engagement.

The framework recommends three targeting methodologies, including those from the SBTi, Transition Pathway Initiative (TPI) and Climate Action 100+ (CA100+).

Insight: as the framework does not provide a target-setting/decarbonisation calculation methodology, the robustness of investor commitments is dependent on companies establishing targets using one of the three aforementioned protocols.

Weblink: Paris Aligned Investment Initiative – IIGCC

*Source: IIGCC. As at 15/08/22.

5. Climate Action 100+ (CA100+)

Topic: net zero

Type: framework

Sector focus: sector agnostic

Signatories/ supporting organisations: 700 institutional investors

Geographic footprint: global

Purpose: to hold the highest global carbon emitters to account, and push them to take action on climate change.

Summary: Established by a collaboration of investor networks, the CA100+ provides investors with insight into how the worlds largest carbon emitters are tackling climate change. The CA100+ uses its Net Zero company benchmark to evaluate its 100+ Focus Companies performance against two types of indicators: Disclosure Framework indicators (that evaluate the adequacy of corporate disclosure), and Alignment Assessments (that evaluate the alignment of company actions with the Paris Agreements goals).

The metrics in the Disclosure Framework are published by the focus companies themselves and aggregated by the Transition Pathway Initiative (TPI), whilst different elements of the Alignment Assessment are performed by the different data providers that support the initiative. The combination of these scores provides investors with a platform for engagement with the Focus Companies on climate change.

Insight: the approach follows a similar methodology to that of the TPI’s management score and assessment of alignment to the Paris Agreement.

Weblink: Climate Action 100+

6. Taskforce on Climate related Financial Disclosures (TCFD)

Topic: climate-related risk and opportunities

Type: framework

Sector focus: sector agnostic

Signatories/ supporting organisations: >2,600 globally (financial and non-financial)

Geographic footprint: global

Purpose: to drive the consideration and integration of the financial risks and opportunities associated with climate change in both financial and non-financial companies.

Summary: Established in 2015 following the Paris Agreement, the framework aims to provide a consistent approach for companies to integrate the consideration of climate-related risks and opportunities into their business models. This integration focuses on four pillars, with a number of recommendations underpinning them:

  1. Governance
  2. Risk Management
  3. Strategy
  4. Metrics & Targets

The use of the four pillars helps to encourage the integration of climate considerations throughout the business. Originally a voluntary framework, regulators globally are using its principles as a base for the creation of their climate reporting obligations.

Insight: due to its formulaic structure the TCFD framework can be repetitive. When drafting your TCFD report, consider cross-referencing to corresponding content in other pillars to aid the reader and reduce the length of the document.

Weblink: Task Force on Climate-Related Financial Disclosures | TCFD) (fsb-tcfd.org)

7. CDP (previously the Carbon Disclosure Project)

Topic: environmental disclosure (climate, forests and water)

Type: reporting platform

Sector focus: sector specific (specific questions for different sectors)

Signatories/ supporting organisations: 13000+ companies and 1,100+ cities, states and regions

Geographic footprint: global

Purpose: to focus investors, companies, cities and governments on building a sustainable economy by measuring and acting on their environmental impact.

Summary: due to its establishment in 2000, the CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. Due to its history, the CDP now has one of the most comprehensive environmental datasets globally. By responding to a number of questions, that cover both breadth and depth of a companies operations, the system provides a score for each discloser; from A (leader) to D- (laggard). Originally focused purely on climate, the system has been extended to include both forests and water (hence the rebrand). Though only climate currently contributes to a company’s score, this is expected to change from 2023.

Insight: as a self-reporting tool, CDP has been criticised for its reliability. This is, however,  becoming less of a concern given rising regulatory and investor scrutiny on the robustness of public disclosures on environmental impact.

Weblink: Home - CDP

8. Partnership for Carbon Accounting Financials (PCAF)

Topic: greenhouse gas emissions accounting

Type: accounting standard

Sector focus: Financial Institutions

Signatories/ supporting organisations: >250 signatories

Geographic footprint: global

Purpose: to enable the consistent measurement and reporting of greenhouse gas emissions by the financial industry.

Summary: starting in the Netherlands in 2015, the standard became global in 2019 and provides a consistent methodology for the calculation of financed emissions by financial institutions, from banks to pension funds. Currently, the standard covers the calculation of financed emissions across:

  • Listed equity and corporate bonds;
  • Business loans and unlisted equity;
  • Project finance;
  • Commercial real estate;
  • Mortgages, and;
  • Motor vehicle loans

Given the complexities, PCAF are still consulting the industry regarding the treatment of emissions from sovereign bonds.

Insight: the PCAF standard underpins the calculation methodology used in the SBTi. Despite using differing terminology from the TCFD for its climate metrics (e.g. SBTi use ‘Portfolio intensity,’ whilst the TCFD refers to the same metric as Carbon Footprint), their calculation methodologies are aligned.

Weblink: PCAF: Enabling financial institutions to assess greenhouse gas emissions | PCAF (carbonaccountingfinancials.com)

9. Transition Pathway Initiative (TPI)

Topic: Paris Agreement alignment

Type: reporting platform

Sector focus: sector agnostic

Signatories/ supporting organisations: 131

Geographic footprint: global

Purpose: to assess companies’ preparedness for the transition to a low-carbon economy, supporting efforts to address climate change.

Summary: launched in 2017, the TPI is an asset-owner led reporting initiative, supported by asset managers, that aims to measure the alignment of some of the largest polluters business models to the objectives of the Paris Agreement. This is executed through a two-part assessment:

  1. A ‘Management Quality’ score – using 19 indicators, ranging from acknowledgement of climate change, to alignment of lobbying activity to the goals of the Paris Agreement, each company is graded from ‘unaware (0)’ to ‘strategic assessment (4)’
  2. A ‘Carbon Performance’ score – assesses how the trajectory in a companies reduction in carbon emissions maps to three key climate scenarios: national pledges; below 2 degrees, and; a 1.5 degrees scenario.

The tool is free for investors to use and monitors almost 500 companies; using FTSE Russel as its data provider.

Insight: the TPI and FTSE Russel have come together to produce a ‘Climate Transition Index Series’ that aims to assess companies’ preparedness to a low-carbon economy. In 2019, the Church of England Pensions Board (a founder of the TPI) allocated £60m to the index1.

Weblink: Home - Transition Pathway Initiative

1FTSE TPI Climate Transition Index, 2019.

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