To avoid the worst impacts of climate change and reach the Paris Agreement’s goals of keeping temperatures from rising more than 2°C – while aiming for 1.5°C – global greenhouse gas emissions need to drop to zero by mid-century.

That’s a huge feat for all countries and for every sector of the global economy – one that will require a profound transformation of our energy systems, the built environment, agriculture, and transportation. But the challenge of reaching net zero is within our reach, with strong political leadership and dedication from actors across society over the coming decades. And we should all want that future given what we now know about the economic, environmental, and health benefits that will accrue to those who set out to tackle the climate challenge with gusto.

One of the most critical stakeholders in the transition to a low-carbon economy is the financial industry, which sets the course for the economy’s future through its investment decisions. Over the past year, a growing number of investors have committed to aligning their investment portfolios with this net-zero emissions trajectory, most notably through the creation of a Net-Zero Asset Owner Alliance.

The Net Zero Asset Owner Alliance

The Net Zero Asset Owner Alliance, launched at the UN Secretary-General’s Climate Action Summit last September, brings together several of the world’s largest pension funds and insurers around a joint commitment to transition their portfolios to net-zero emissions by 2050.

The Alliance has since grown to 25 members with nearly $5 trillion in assets under management.

The Alliance does more than simply set long-term goals. The institutional investors in the Alliance are setting measurable intermediary targets for themselves and will be reporting on their progress in parallel with the Paris Agreement’s five-year reporting cycle – and they are making themselves publicly accountable for implementing their strategies and meeting their commitments.

To do this, Alliance members work with companies they invest in to ensure they adopt climate-smart practices and drive greenhouse gas emissions out of their operations and supply chains. They also commit to contributing to common metrics, methodologies, and tools to help incorporate climate change considerations in their investment analysis.

While Alliance members choose their own strategies to reach carbon neutrality – whether through strategic asset allocation, low-carbon investment or divestment – they share a vision of using active ownership and public advocacy as catalysts for change.

Taking the next step

On June 9, the UN Foundation, in partnership with Ceres and the UN Office for Partnerships, hosted a webinar on Investors Aligning with the Paris Agreement – Setting Investment Portfolios on a Path Toward Zero Emissions. As part of the biennial Investor Summit on Climate Risk, the virtual event showcased the leadership of several of the founders of the Alliance – the insurance company Allianz, the pension fund Caisse de dépôt et placement du Québec (CDPQ), and the UN Environment Program Finance Initiative (UNEP FI) – which, along with the Principles for Responsible Investment, hosts the secretariat for the Alliance.

During the session, the speakers raised several important points about their efforts to drive emissions to zero in their investment portfolios – and ultimately in the economy as a whole:

  • Leadership on climate involves setting net zero as the end goal even though it is not yet entirely clear how investors will get there – Panelists recognized that they don’t yet have all the answers about how they will reach net zero in their investment portfolios. But they have set stretch goals before and successfully met them. So even in a situation where they currently lack comprehensive information and strategies, they’re nonetheless embarking on the path toward zero emissions. “While methodologies are not perfect, what we certainly can’t lose any more of is time,” said Urs Bitterling, Head of Corporate Responsibility at Allianz.
  • Direct engagement with companies is a critical strategy on the road to zero emissions – “The starting point is to engage on a sectoral basis” and “work with companies to help them reduce emissions,” said Eric Usher, Head of UNEP FI. Panelists stressed that tools such as the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) play an important role in helping companies understand, disclose, and communicate the risks and opportunities presented by climate change.
  • We need all actors and sectors to engage in order to successfully decarbonize the global economy – Net zero efforts by investors will ultimately only be successful if actors across the economy and society join in. Caroline Laberge, Advisor at CDPQ, reaffirmed that the investment community cannot do it alone. The Alliance needs to “get more people on board and have an even more inclusive dialogue,” including with “politicians and the banking sector,” she said.

COVID-19 has forced our world to reckon with a crisis that affects us all. Its effects do not recognize borders, and its consequences will fundamentally reshape global economies. The climate crisis shares many of the same features and will demand the same whole-of-society approach.

But unlike COVID-19, which we will likely be able to treat with vaccines and therapeutics in the coming years, the climate challenge requires that we look decades into the future, and work backward from the goal of net zero emissions. That approach can radically transform our economies while helping protect us from the devasting economic impact of climate change. The investors who lead the charge toward that goal, including the members of the Net Zero Asset Owner Alliance, will show us the way – and reap many of the benefits of having acted early.