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New Framework Gives Pension Funds a Blueprint for Net-Zero Investing

A group backed by 70 major investors with more than US$16 trillion under management has launched the Net Zero Investment Framework, the world’s first blueprint to help pension funds and other big investing institutions match the composition of their investment portfolios with the goals of the Paris Agreement.

“The willingness is there, but until now the investment sector has lacked a framework enabling it to deliver on this ambition,” said Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change (IIGCC). With countries, cities, and companies committing to net-zero emission targets, “the race is now on in the run-up to COP26 for asset owners and managers to show they will be net-zero investors.”

“Investors need to play a central role if the world is to meet the Paris commitment of limiting climate change to below two degrees,” added Laura Chappell, CEO of the Brunel Pension Partnership. “The Net Zero Investment Framework is of critical importance because it answers the fundamental and urgent question of what a Paris-aligned portfolio actually looks like.”

While many investors “have pledged high-level support to the goals of the 2015 Paris deal,” the new framework “is the first to lay out the steps they need to take to ensure the commitment is backed up by the necessary action,” Reuters reports. “The plan sets concrete targets at the portfolio and asset class level and also addresses asset allocation, engagement, and lobbying.”

It could include measures to increase the percentage of assets a fund invests in low-carbon indexes, or to insist companies that receive investment dollars link executive pay to climate-related targets.

The blueprint is still in draft form, IIGCC says. But over the next few months, five pension funds with combined assets of $1.3 trillion—APG, Brunel, the Church of England Pensions Board, PKA, and Phoenix Group—“will test the framework by modelling its impact across the performance of their real-word portfolios,” The Actuary reports. 

“The focus on real-world decarbonization overcomes limitations of other approaches—based only on portfolio emissions reduction or portfolio temperature targets—which leave room for investors to technically meet targets while selling the problem to someone else,” the industry publication adds.