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Asset Level Assessment & Targets

Helping investors shift the alignment of underlying holdings (assets) to be consistent with net zero goals and objectives.

Net zero target setting and implementation guidance is specific for each asset class, although the overall target structure remains the same and aggregation across asset classes remains possible.

Core action points

NZIF recommends the following actions for investors using the framework and considers them core:

  • Set the scope of assets within each asset class for alignment action.
  • Assess and disclose the baseline alignment of assets in scope, using the specified criteria relevant to each asset class.
  • Define and disclose which sectors have been considered as high impact.
  • Set and disclose short term targets and implement approaches to improve alignment of assets by asset class:
    • Asset alignment target: A 5-year target for increasing the % of AUM (or financed emissions) in material sectors that are ‘aligning’ or ‘aligned’ to a net zero pathway, or achieving net zero’.
    • Engagement threshold target: A minimum proportion of assets (based on scope 1 and 2 of financed emissions) are assessed as ‘achieving’ or ‘aligned’ to a net zero pathway, or are subject to engagement, increasing gradually over time. This should be accompanied by a description of the investor’s approach or strategy regarding engagement with assets with material scope 3 emissions.
Advanced action points

NZIF recommends the following advanced actions. These may initially be difficult when beginning to set and implement net zero targets (when attention is likely to be placed on implementing core action points), but would likely prove beneficial over the long term:

  • Disclose the science-based scenario(s) or pathway(s) used to guide target setting and assess the alignment of investments, including how scenarios meet key parameters, and critical assumptions used.
  • Disclose why any assets are not in scope under asset level targets, including the process, progress, and timeline for inclusion.
  • Regularly assess and disclose alignment of assets, including those not in scope.
  • Disclose metrics, targets and methodologies used to assess and track alignment of assets according to each asset class, and the extent to which these are consistent with NZIF's target setting methodology.
  • Disclose portfolio construction approaches implemented and/or products developed to facilitate allocation to products aligned with net zero objectives.
  • Disclose engagement, stewardship, and/or direct management actions undertaken in relation to the engagement threshold target, and key outcomes achieved.
  • Disclose where divestment or exclusion has been used, the rationale, and the extent to which this has been the means to achieve targets.
  • In addition to the engagement threshold based on scope 1 and 2 of financed emissions, disclose a ‘shadow’ engagement threshold metric for material scope 3 of financed emissions, to indicate the proportion of assets (based on material scope 3) that are assessed as ‘achieving’ or ‘aligned’ to a net zero pathway or are subject to engagement.

Performance expectations

It is expected that by 2040 that 100% of assets are, as a minimum, aligned to a net zero pathway. This applies across all asset classes set out below. This expectation aims to enhance the probability that 100% of assets are consistent with the global goal to achieve net zero by 2050 and thus consistent with investors transitioning their individual portfolios in a manner consistent with global net zero goals.

Within the engagement threshold target it is expected that investors set an engagement threshold target which immediately ensures that at least 70% of scope 1 and 2 financed emissions in material sectors are originating in assets that are either categorised as achieving net zero, aligned to a net zero pathway, or are subject to engagement and stewardship actions. This threshold should increase at least to 90% by 2030 at the latest.

These expectations are not requirements of NZIF itself, they serve as a guide. Investors should seek to determine what these precise figures should be for themselves based on their individual strategies, circumstances, and definitions. They should also decide what assets and asset classes should be in scope of these expectations.

Investors utilise a range of approaches and face a number of constraints, some of which they do not have full agency to address. Consequently, generic industry wide performance expectations are not generally considered possible. However, investors can disclose their individual performance against these generic performance expectations, explaining the reasons for any divergence.

Selective divestment

As a general rule, NZIF does not recommend divestment from secondary equity markets as an approach to drive alignment in individual portfolios, especially when primary market issuances such as bonds are more associated with new production capacity. However, investors could consider divestment or exclusion based on their own strategies and client/beneficiary needs and:


  • As a consequence of climate financial risk assessment.
  • As a consequence of escalation following engagement.
  • For companies whose primary activities and expansion plans are incompatible with a credible net zero pathway, with exclusions identified over relevant timeframes.

NZIF recommends investors develop a deforestation and energy investment policy to inform strategies and activities, as associated transition risks may become more acute in the future as the likelihood of a disorderly transition increases.

Alignment assessment methodology

NZIF consistently uses five categories of alignment, representing progressive steps towards alignment with a net zero pathway. Investors can use these to evaluate where investments are on this progression and by extension, a forward-looking nuanced understanding of their portfolio alignment (when investments are aggregated). The five categories are:


  • ‘Not aligning’: Refers to assets without a commitment to decarbonise in a manner consistent with achieving global net zero.
  • ‘Committed to aligning’: Refers to assets with a long term decarbonisation goal consistent with achieving global net zero by 2050.
  • ‘Aligning to a net zero pathway’: Refers to assets with emissions performance not equal to a contextually relevant net zero pathway. However, importantly they have science-based targets and a decarbonisation plan, and are thus ready to transition.
  • ‘Aligned to a net zero pathway’: Refers to assets which have science-based targets, a decarbonisation plan, and current absolute or emissions intensity at least equal to a relevant net zero pathway. This category broadly signifies that transition risk is being managed at an asset level.
  • ‘Achieving net zero’: Typically, refers to when assets meet all relevant criteria and have an emissions performance at net zero which can be expected to continue.

Criteria underpinning NZIF 
asset alignment

NZIF uses a set of ten backwards, current, and forward-looking criteria to assess assets, but only a subset to determine alignment. The subset differs across each asset class due to specificities and whether assets are in high impact material sectors.

A subset is used because data availability and/or quality can be problematic (e.g., within emerging markets). High impact material sectors require more attention and thus criteria as they underpin economies via their inputs, and are vital to wider decarbonisation efforts. Other material sectors use fewer criteria to reduce the data dependency of the alignment process because they are expected to decarbonise as inputs into economies decarbonise.

The set of ten backwards, current, and forward-looking criteria used by NZIF to assess assets are set out in NZIF on page 23 [insert link]. These are specified in more detail under each asset class to ensure they are contextually specific. For the criteria used for each asset class, please see specific guidance for that asset class below.

The criteria laid out above provide a high-level framework for the alignment assessment of investments. Indicators for each criterion are purposefully unspecified to allow investors the flexibility to determine what indicators and data sources suit their circumstances. The criteria and subsequent assessment should cover scope 1, 2 and material scope 3 emissions. Investors should explain and justify the materiality approach taken.

Information on alignment criteria and indicators should be found within the transition plans of investments and should be chosen until decisions on the alignment of an asset can be adequately made. Investors should disclose, as appropriate, the indicators and data sources used to determine the fulfilment of alignment criteria.

Material sectors

NZIF considers sectors covered by NACE codes A-H and J-L as material and should be covered at a minimum by net zero objectives and targets:


  • A) Agriculture, forestry and fishing
  • B) Mining and quarrying
  • C) Manufacturing
  • D) Electricity, gas, steam and air conditioning supply
  • E) Water supply; sewerage; waste management and remediation activities
  • F) Construction
  • G) Wholesale and retail trade; repair of motor vehicles and motorcycles
  • H) Transporting and storage
  • J) Information and communication
  • K) Financial and insurance activities
  • L) Real estate activities

Sectors which are not considered material are not the recommended subject of NZIF net zero objectives and targets. This is so that investor net zero efforts are channelled to material sources of GHG emissions.

 

High impact material sectors

Certain material sectors are deemed high impact based on GHG emissions in their value chain. Transition of high impact material sectors are critical to achieving net zero and are those linked to the company focus lists of Climate Action 100+ and TPI, plus banks, real estate, agriculture, forestry, and fishing. Currently these sectors equate to:


  • Agriculture, forestry, and fishing
  • Airlines
  • Aluminium
  • Automobiles
  • Banking
  • Cement
  • Chemicals
  • Consumer goods & services
  • Coal and diversified mining
  • Electric utilities
  • Food producers
  • Industrials
  • Oil and gas (plus distribution)
  • Paper
  • Real estate
  • Shipping
  • Steel
  • Transportation

Investments in listed and unlisted corporates that are within high impact material sectors must satisfy more criteria to be classified as ‘aligned to a net zero pathway’ (typically decarbonisation plan and capital allocation alignment), as exposure to transition risk will be especially prevalent in these sectors and they are key to decarbonising the wider economy.

It is expected that by 2040 that 100% of assets are, as a minimum, aligned to a net zero pathway. This applies across all asset classes set out below. This expectation aims to enhance the probability that 100% of assets are consistent with the global goal to achieve net zero by 2050 and thus consistent with investors transitioning their individual portfolios in a manner consistent with global net zero goals.

Within the engagement threshold target it is expected that investors set an engagement threshold target which immediately ensures that at least 70% of scope 1 and 2 financed emissions in material sectors are originating in assets that are either categorised as achieving net zero, aligned to a net zero pathway, or are subject to engagement and stewardship actions. This threshold should increase at least to 90% by 2030 at the latest.

These expectations are not requirements of NZIF itself, they serve as a guide. Investors should seek to determine what these precise figures should be for themselves based on their individual strategies, circumstances, and definitions. They should also decide what assets and asset classes should be in scope of these expectations.

Investors utilise a range of approaches and face a number of constraints, some of which they do not have full agency to address. Consequently, generic industry wide performance expectations are not generally considered possible. However, investors can disclose their individual performance against these generic performance expectations, explaining the reasons for any divergence.

As a general rule, NZIF does not recommend divestment from secondary equity markets as an approach to drive alignment in individual portfolios, especially when primary market issuances such as bonds are more associated with new production capacity. However, investors could consider divestment or exclusion based on their own strategies and client/beneficiary needs and:


  • As a consequence of climate financial risk assessment.
  • As a consequence of escalation following engagement.
  • For companies whose primary activities and expansion plans are incompatible with a credible net zero pathway, with exclusions identified over relevant timeframes.

NZIF recommends investors develop a deforestation and energy investment policy to inform strategies and activities, as associated transition risks may become more acute in the future as the likelihood of a disorderly transition increases.

NZIF consistently uses five categories of alignment, representing progressive steps towards alignment with a net zero pathway. Investors can use these to evaluate where investments are on this progression and by extension, a forward-looking nuanced understanding of their portfolio alignment (when investments are aggregated). The five categories are:


  • ‘Not aligning’: Refers to assets without a commitment to decarbonise in a manner consistent with achieving global net zero.
  • ‘Committed to aligning’: Refers to assets with a long term decarbonisation goal consistent with achieving global net zero by 2050.
  • ‘Aligning to a net zero pathway’: Refers to assets with emissions performance not equal to a contextually relevant net zero pathway. However, importantly they have science-based targets and a decarbonisation plan, and are thus ready to transition.
  • ‘Aligned to a net zero pathway’: Refers to assets which have science-based targets, a decarbonisation plan, and current absolute or emissions intensity at least equal to a relevant net zero pathway. This category broadly signifies that transition risk is being managed at an asset level.
  • ‘Achieving net zero’: Typically, refers to when assets meet all relevant criteria and have an emissions performance at net zero which can be expected to continue.

NZIF uses a set of ten backwards, current, and forward-looking criteria to assess assets, but only a subset to determine alignment. The subset differs across each asset class due to specificities and whether assets are in high impact material sectors.

A subset is used because data availability and/or quality can be problematic (e.g., within emerging markets). High impact material sectors require more attention and thus criteria as they underpin economies via their inputs, and are vital to wider decarbonisation efforts. Other material sectors use fewer criteria to reduce the data dependency of the alignment process because they are expected to decarbonise as inputs into economies decarbonise.

The set of ten backwards, current, and forward-looking criteria used by NZIF to assess assets are set out in NZIF on page 23 [insert link]. These are specified in more detail under each asset class to ensure they are contextually specific. For the criteria used for each asset class, please see specific guidance for that asset class below.

The criteria laid out above provide a high-level framework for the alignment assessment of investments. Indicators for each criterion are purposefully unspecified to allow investors the flexibility to determine what indicators and data sources suit their circumstances. The criteria and subsequent assessment should cover scope 1, 2 and material scope 3 emissions. Investors should explain and justify the materiality approach taken.

Information on alignment criteria and indicators should be found within the transition plans of investments and should be chosen until decisions on the alignment of an asset can be adequately made. Investors should disclose, as appropriate, the indicators and data sources used to determine the fulfilment of alignment criteria.

NZIF considers sectors covered by NACE codes A-H and J-L as material and should be covered at a minimum by net zero objectives and targets:


  • A) Agriculture, forestry and fishing
  • B) Mining and quarrying
  • C) Manufacturing
  • D) Electricity, gas, steam and air conditioning supply
  • E) Water supply; sewerage; waste management and remediation activities
  • F) Construction
  • G) Wholesale and retail trade; repair of motor vehicles and motorcycles
  • H) Transporting and storage
  • J) Information and communication
  • K) Financial and insurance activities
  • L) Real estate activities

Sectors which are not considered material are not the recommended subject of NZIF net zero objectives and targets. This is so that investor net zero efforts are channelled to material sources of GHG emissions.

 

Certain material sectors are deemed high impact based on GHG emissions in their value chain. Transition of high impact material sectors are critical to achieving net zero and are those linked to the company focus lists of Climate Action 100+ and TPI, plus banks, real estate, agriculture, forestry, and fishing. Currently these sectors equate to:


  • Agriculture, forestry, and fishing
  • Airlines
  • Aluminium
  • Automobiles
  • Banking
  • Cement
  • Chemicals
  • Consumer goods & services
  • Coal and diversified mining
  • Electric utilities
  • Food producers
  • Industrials
  • Oil and gas (plus distribution)
  • Paper
  • Real estate
  • Shipping
  • Steel
  • Transportation

Investments in listed and unlisted corporates that are within high impact material sectors must satisfy more criteria to be classified as ‘aligned to a net zero pathway’ (typically decarbonisation plan and capital allocation alignment), as exposure to transition risk will be especially prevalent in these sectors and they are key to decarbonising the wider economy.

Asset classes:

Listed Equity & Corporate Fixed Income

Sovereign Bonds

Real Estate

Infrastructure

Private Equity

Private Debt