Asset Level Assessment & Targets

Sectors

Sectors considered “material” to the net zero transition are defined as those in NACE code categories A-H and J-L, are recommended to be considered for assessment High impact sectors (CA100+ or TPI companies) are required to meet more of the alignment criteria to be considered ‘aligned’.

Scope 3

• Alignment: The asset alignment criteria and subsequent assessment are recommended to cover scope 1, 2 and material scope 3 emissions
• Engagement: The target recommended to be based on % of scope 1 and 2 financed emissions, but should be accompanied by a description of the investor’s approach or strategy.

Assessing alignment

To set alignment targets, investors will need to undertake an assessment of the current and past alignment of assets against the alignment criteria set out in NZIF to categorise assets against NZIF’s maturity scale.

Criteria

• Ambition
• Targets
• Emissions performance
• Disclosure
• Decarbonisation plan
• Capital allocation alignment
• Climate policy engagement
• Climate governance
• Just transition
• Climate risk and accounts

Maturity scale

• Achieving net zero
• Aligned to a net zero pathway
• Aligning to a net zero pathway
• Committed to aligning
• Not aligning

Setting targets

Investors are recommended to set a short term target for increasing the % of AUM or financed emissions that can be considered ‘aligned’ to a net zero pathway or achieving net zero. In the case of sovereign bonds, this is based on % of sovereign bonds allocation to issuers that are categorised as ‘aligned’ or ‘achieving net zero’.

Using AUM or financed emissions to set asset alignment targets

It is important investors recognise the implications of whichever metric is selected to set the target. Setting the asset alignment target based on AUM can avoid the issue of declining financed emissions proportions over time, as a greater proportion of assets can be considered “aligned”. Selecting financed emissions as the metric may support investors in prioritising efforts to increase the net zero alignment of the highest emitting assets within the portfolio.

You can see illustrative examples of how increased alignment might correlate with AUM and financed emissions in the guidance document.

Investor levers to increase portfolio alignment

Across all asset classes, portfolio construction, capital allocation decisions and engagement and stewardship are key levers to support the achievement of the asset alignment target. Guidance for implementing these levers, among others, are detailed for each asset class.

Disclosure

To ensure targets remain robust and are updated appropriately, and progress can be communicated clearly with relevant stakeholders, investors are recommended to provide certain backward looking disclosures relating to how asset alignment has been achieved.

Attribution analysis

Investors can perform attribution analysis to understand the drivers of changes to the proportion of assets classified along the alignment maturity scale. This can inform net zero strategies, guide engagement and enhance transparency. See step 6 of the portfolio decarbonisation reference objective for listed equities, which provides guidance on undertaking attribution analysis for portfolio emissions changes; many of the drivers recommended for decarbonisation assessment below are relevant for alignment assessment.