Institutional Investors Group on Climate Change                            FSUK0038

Written evidence submitted by the Institutional Investors Group on Climate Change (IIGCC)

Summary

Contents

About the Institutional Investors Group on Climate Change (IIGCC)

Aligning Investment with the Net Zero Transition

Voluntary Investor Fora

Engaging Corporates on the Net Zero Transition

Fossil Fuel Investment

Nature and Biodiversity

The Role for Government Policy

Summary List of Recommendations for Government

About the Institutional Investors Group on Climate Change (IIGCC)

IIGCC is the leading global investor membership body and the largest one focusing on climate change specifically. Our mission is to support and enable the investment community in driving significant and real progress by 2030 towards a net zero and resilient future. IIGCC’s 400+ members, representing over €65 trillion (tn) assets under management (AUM) and 25 countries, can catalyse real world change through their capital allocation decisions, stewardship and engagement with companies and the wider market, as well as through their policy advocacy.

Aligning Investment with the Net Zero Transition

IIGCC works with institutional investors to scale net zero commitments and supports them in translating these commitments into real world impact. The key vehicle for this is the Net Zero Investment Framework (NZIF), developed collaboratively with 70+ institutional investors and published by IIGCC in March 2021.

The NZIF is the most widely used alignment framework by institutional investors globally. Currently, 161 investors, managing US$ 12.1tn, use the NZIF towards their Net Zero commitments made under the Paris Aligned Asset Owners Commitment or the Net Zero Asset Managers initiative. 

NZIF is designed to enable investors to maximise their impact in driving real-world decarbonisation. It sets out recommended and best practice actions, metrics and methodologies for implementing a net zero investment strategy. It makes clear that such strategies should be supported by concrete targets set at portfolio and asset level – combined with smart capital allocation, and engagement and advocacy activity.

The aim is to provide a framework that can be used by asset owners and asset managers, all of whom will have differing mandates and starting points from which they make their own decisions. The Framework currently provides guidance for investments in listed equity, corporate fixed income, real estate and sovereign bonds. Since launching NZIF, IIGCC continues to work with investors to expand NZIF across additional asset classes and thematic components, including  private equity and infrastructure.

 

Voluntary Investor Fora

IIGCC believes that voluntary investor fora have an important role to play in supporting the net zero transition. IIGCC plays an active role in two such fora: the Paris Aligned Investment Initiative (PAII) and the Net Zero Asset Managers initiative (NZAM). Both initiatives are formal partners of the UNFCCC’s Race to Zero and are founding member initiatives of the Glasgow Financial Alliance for Net Zero (GFANZ). 

 

These voluntary fora between a large number of progressive investors, representing a significant AUM between them, has led to an expanded coverage of net zero alignment methodologies and increased ambition of investors’ net zero targets.

 

The Paris Aligned Investment Initiative (PAII),  an investor-led global forum, was launched by IIGCC in May 2019, to enable investors to align their portfolios and activities to the goals of the Paris Agreement. The PAII developed the Paris Aligned Asset Owners (PAAO) commitment, where asset owner signatories voluntarily agree to 10-points covering target-setting and transitioning investments to Net Zero greenhouse gas emissions by 2050 or sooner. Currently 56 asset owners, managing US$3.3tn have made this commitment and 40 of these have submitted interim targets, all using the NZIF. The recently published Paris Aligned Asset Owners 2022 Progress Report provides further details on the progress that has been made along with case studies.

 

The Net Zero Asset Managers (NZAM) initiative was formed in late 2020 by IIGCC and its members along with global network partners.[1] NZAM is an international group of asset managers committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner. As of 31 December 2022, NZAM has 301 signatories who manage US$59 tn. 196 Signatories have submitted interim targets, covering US$ 22.2 tn and 121 signatories have used NZIF in setting these targets.

 

Signatories to NZAM voluntarily agree to a ten-point commitment, which includes reviewing interim targets at least every five years, with a view to ratcheting up the proportion of AUM covered until 100% of their assets are included. Full details of the NZAM commitment as well as further details on the progress that has been made are included in the Net Zero Asset Managers Initiative Initial Target Disclosure Report May 2022 and the subsequent November 2022 update on initial target disclosure. Up-to-date details of NZAM signatories’ current targets are also publicly available online.

  

Engaging Corporates on the Net Zero Transition

In addition to working with investors to support the alignment of their portfolios with the net zero transition, IIGCC also facilitates effective stewardship and active ownership across our members’ listed equity and corporate bond holdings. This includes a focus on ensuring investee companies have credible plans in place to align with the transition to net zero and report on progress. 

Stewardship

The PAII recommends that investors prioritise stewardship and engagement as the primary mechanism to drive net zero alignment. This prioritises reductions in real-world emissions over ‘greener’ portfolios. This is why NZIF, NZAM and PAAO asks investors to set and implement stewardship and engagement policies to support their net zero commitments.

 

IIGCC has a long history of working with investors on stewardship, including co-founding Climate Action 100+ in 2017, the world’s largest climate-focused investor engagement initiative. The investor signatories of Climate Action 100+ believe that engaging with their investees to encourage the development of robust emissions reduction strategies and enhanced climate disclosures is essential to achieving net zero. It is also consistent with their fiduciary duty to manage risk and long-term returns. 

 

Investor engagement through the initiative has played a significant role in accelerating the net zero journey of CA100+ focus companies. IIGCC supported investors have delivered strong progress in Europe, including in the UK, with net zero commitments now made across all focus companies (>80% covering scope 3 emissions).

 

IIGCC’s Stewardship Working Group helps investors to improve their stewardship and engagement practices to deliver on their net zero commitments and drive real-world emissions reductions. In 2022, IIGCC published the Net Zero Stewardship Toolkit which sets a foundational step-by-step framework for climate stewardship, engagement and voting, and is increasingly seen as a best practice foundation for investors.

 

Investors implementing NZIF need to understand the commitments being made by their investees are credible. To meet this need, IIGCC has also developed the Investor Expectations of Corporate Transition Plans: From A to Zero. This document aims to define the key components of a credible transition plan, applicable to companies of different sizes across a range of sectors and geographies, soliciting the data investors need to track progress and inform their engagement conversations.

 

Stewardship and the Policy Landscape

Given the importance of stewardship and engagement to investors’ supporting the transition, IIGCC welcomes policy developments aimed at further integrating stewardship into the investment process. Having the right policy environment is critical to companies being able to transition confidently and effectively to net zero. Sequencing is important: if the policy environment is not supportive of actions to transition to net zero, or does not facilitate effective stewardship and engagement, investors are less able to support companies to take the appropriate steps to transition.

 

While not mandatory, the UK Stewardship Code has been influential in driving stewardship up the agenda for international asset managers and owners. IIGCC intends to continue working with the Financial Reporting Council to ensure alignment between IIGCC’s guidance and the code.

 

To this end, IIGCC also welcomes the focus on stewardship and engagement in the FCA’s consultation on Sustainability Disclosure Requirements and investment labels. However, we note that stewardship should be a primary channel for delivering sustainability outcomes across all three labels (not just the proposed ‘improvers’ label), setting a clear expectation that stewardship is part of investors’ duty to clients and integral to protecting long-term value as well as driving positive change at companies.

 

Divestment

The alternative of mass divestment is not an option for many globally diversified investors, whether passive or active, nor does it necessarily lead to real world emissions reductions. For instance, it could push assets into the hands of investors with little or no regard for climate change, thereby prolonging or exacerbating the negative impacts. Divestment does have a place, but it is only one tool amongst many others that may be used as part of a broader escalation strategy.

 

IIGCC does not see engagement and divestment as an either/or approach. IIGCC recommends that investors take a ‘stewardship-first approach’, whereby an investor uses other tools to engage and escalate (as set out in the Net Zero Stewardship Toolkit) before considering divestment as a last resort.

 

Fossil Fuel Investment

Capital Allocation

Explicit reference to fossil fuel divestment is not included in NZAM or PAAO commitment statements. IIGCC encourages investors to develop a responsible fossil fuel investment policy and transparency through annual reporting against these policies. In order to be consistent with credible 1.5˚C warming scenarios, the NZIF recommends that investors should not allocate additional capital to companies which are planning or constructing new thermal coal projects and associated infrastructure (power, mining) or any new exploitation of tar sands. The NZIF is structured on an ‘implement or explain’ basis so only makes these recommendations on the basis that investors will implement guidance where it is in line with regulation and other fiduciary and contractual considerations.

 

Stewardship and Engagement Approaches for Fossil Fuel Investment

Where investors are existing shareholders or bondholders in companies considering such activities, they are encouraged to use active and escalating engagement with the aim of ensuring no new thermal coal generation is developed and no further tar sand resources are exploited. Additionally, they should ensure that phase out of existing unabated capacity and activity is undertaken in line with net zero pathways. In advocating for these transition plans, investors should recognise the need for a just transition in countries or regions where there is significant economic dependence on thermal coal power or mining.

 

Net Zero Standards for Oil & Gas and Mining

To support investor engagement with the corporates in which they are invested, IIGCC, in conjunction with its members and feedback from industry, is also developing frameworks, or Net Zero Standards (NZS), that evaluate the full range of disclosure and transition strategies set out by oil and gas and mining companies seeking to transition to net zero. These frameworks are designed to aid investors using the NZIF to align their portfolios with net zero and inform their engagement efforts. An NZS for oil and gas was initially published in September 2021, piloted with leading European companies in 2022, and the final version is expected to be  launched in April 2023. The NZS for mining is also expected to be released in Q2 2023.

 

Nature and Biodiversity

IIIGCC recognises that the climate and biodiversity challenges are interlinked and must be addressed in tandem. Climate change is a leading driver of biodiversity loss and about a quarter of greenhouse gas emissions derive from agriculture, forestry, and other land use. About half of emissions from land use are due to deforestation and forest degradation. Halting the drivers of biodiversity loss, particularly land use change, is integral to achieving net zero targets.

 

Historically, tackling climate change has received greater investor, corporate and policymaker attention than addressing nature loss and integrating these two important areas could be an area for the Committee to consider further in the future.

 

The Role for Government Policy

By allocating capital towards climate solutions and effectively engaging with the companies they are invested in, investors can accelerate the global transition away from fossil fuels to a net zero economy. However, there is a critical need for policymakers to establish an enabling regulatory environment and address any policy-related barriers to investment in the net zero transition. This includes implementing policies that ‘green’ financial regulation, scale green finance flows and establish positive feedback loops between financial services and real economy policies.

Creating an Enabling Policy Environment for Greening Finance

IIGCC emphasise the need for a swift rollout of Sustainability Disclosure Requirements (SDR) and subsequent incorporation of the International Sustainability Standards Board’s (ISSB) standards and the frameworks being developed by the UK Transition Plan Taskforce (TPT). Effective implementation of SDRs will increase the availability of granular, high-quality climate and transition-related disclosures, helping to mitigate greenwashing risks and inform investment decisions and capital allocation. Clarity should be provided on the proposed SDR regime for listed companies, and the risk of potential sequencing mismatches with investor requirements carefully managed. To further increase data availability, IIGCC strongly supports an extension of SDR’s coverage to large private companies and pension schemes, in line with the UK’s TCFD regime.

 

To the extent possible, the UK Government needs to ensure that the UK’s sustainability disclosure framework is interoperable with those in other jurisdictions (including the EU) to reduce fragmentation in the global reporting landscape and enable investors to compare their holdings globally.

The UK Government also needs to uphold commitments to develop high-quality transition plan disclosure requirements, to be taken forward by TPT and integrated into mandatory reporting requirements under SDR. Transition plan requirements should be linked to the achievement of the goals of the Paris Agreement and the UK’s net zero target. The scope of the TPT’s transition plan disclosures should be extended to cover all companies (including large private companies) and financial institutions in scope of the UK TCFD regime.

TPT disclosures should be consistent with the wider ecosystem of established and emerging transition plan guidance and best practice, including the NZIF and IIGCC’s sector-neutral guidance. This will help to ensure that transition plan reporting provides investors with the information they need to credibly assess the potential of their holdings to align with net zero and the short- and medium-term actions they are taking to deliver on their net zero commitments. For more information on IIGCC’s positions on this topic, please see IIGCC’s response to the TPT’s consultation on a sector-neutral disclosure framework and accompanying implementation guidance.

Support Financing Green

IIGCC urges the Government to accelerate work to implement a UK Green Taxonomy within the UK’s regulatory architecture. IIGCC supports the recommendations of the UK Green Technical Advisory Group (GTAG), which include calling for the UK to adopt the same broad concepts, methodologies and metrics as the EU Taxonomy to support interoperability and cross-border capital flows, while also ensuring the criteria are science-based and tailored to the specifics of the UK economy.

 

Establish Positive Feedback Loops between Financial Services and Real Economy Policies

Greater levels of disclosure and transparency alone will not be sufficient to reorient investment flows at the pace and scale need to achieve the UK’s net zero targets. Robust sectoral polices are vital in sending the right price signals to investors and financial institutions, encouraging greater levels of investment in transitioning and sustainable assets and disincentivising investment in harmful activities. This is particularly true in an increasingly competitive global green investment environment where investors are looking for great clarity and certainty to support investment decisions.

 

These policies should be grounded in the best available scientific data, that set out a ‘whole of economy approach’ to the UK’s net zero transition. Sector pathways will complement entity-level transition plan disclosures, providing investors with the policy clarity and certainty they need to invest in climate solutions, engage with assets with credible alignment pathways, and exit ‘stranded’ investments that cannot transition over time.

This should include the Government delivering on its commitments to set out a transition pathway for the financial services sector, as well as produce and regularly update an economy-wide transition plan and detailed roadmaps for key sectors of the real economy. Sector roadmaps should also be underpinned by a Net Zero Investment Plan that tracks financial flows across the economy towards climate goals and support the identification of investment gaps.

Summary List of Recommendations for Government

  1. In relation to Sustainability Disclosure Requirements (SDR) and investment labels, stewardship should be a primary channel for delivering sustainability outcomes across all three labels (not just the proposed ‘improvers’ label).
  2. A swift rollout of SDR and subsequent incorporation of the International Sustainability Standards Board’s (ISSB) standards and the frameworks being developed by the UK Transition Plan Taskforce (TPT).
  3. To further increase data availability, IIGCC strongly supports an extension of SDR’s coverage to large private companies and pension schemes, in line with the UK’s TCFD regime.
  4. The UK's sustainability disclosure framework should be interoperable with those in other jurisdictions (including the EU) to reduce fragmentation in the global reporting landscape and enable investors to compare their holdings globally.
  5. The UK Government should uphold commitments to develop high-quality transition plan disclosure requirements, to be taken forward by TPT and integrated into mandatory reporting requirements under SDR. Transition plan requirements should be linked to the achievement of the goals of the Paris Agreement and the UK’s net zero target.
  6. The scope of the TPT’s transition plan disclosures should be extended to cover all companies (including large private companies) and financial institutions in scope of the UK TCFD regime.
  7. The UK Government should accelerate work to implement a UK Green Taxonomy within the UK’s regulatory architecture.
  8. The UK Government should produce and regularly update an economy-wide transition plan and detailed roadmaps for key sectors of the real economy. This should include the Government delivering on its commitment to set out a transition pathway for the financial services sector.
  9. Sector roadmaps should also be underpinned by a Net Zero Investment Plan that tracks financial flows across the economy towards climate goals and support the identification of investment gaps.

 

March 2023

Disclaimer: All written materials, meetings, communications and initiatives undertaken by IIGCC are designed solely to support investors in understanding risks and opportunities associated with climate change and take action to address them. Our work is conducted in accordance with all the relevant laws, including data protection, competition laws and acting in concert rules. IIGCC’s services to members do not include financial, legal or investment advice.

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[1] Asia Investor Group on Climate Change (AIGCC), Ceres, the Investors Group on Climate Change (IGCC), CDP, and the Principles for Responsible Investment (PRI)