Foreword

Time is running out to avoid the worst impacts of climate change, with the Intergovernmental Panel on Climate Change declaring a ‘code red for humanity’. Investors are committing to align portfolios to net zero, with asset owners and managers responsible for nearly USD 50 trillion in assets committing to the goal of net zero by 2050. To achieve these ambitions, investors must be active stewards, ensuring companies take necessary action and produce 1.5°C aligned short-, medium- and long-term targets. This unprecedented challenge requires a shift in practices, moving from private dialogue to specific, time-bound objective setting paired with escalation.

The net zero stewardship toolkit – a framework for net zero stewardship

The role of this toolkit is to provide all types of investors with a foundational framework to enhance stewardship practices. It aims to deliver the rapid acceleration in decarbonisation required to halve emissions by 2030 and reach net zero by 2050 or sooner. The core process is aligned with the Net Zero Investment Framework recommended targets and stewardship actions. While currently focused on listed equity, it is applicable to corporate fixed income portfolios and will eventually expand to cover other asset classes like private equity and infrastructure.

Overview

The toolkit supports investors that have made net zero commitments, such as those through the Net Zero Asset Managers initiative (NZAM) or Paris Aligned Asset Owners (PAAO). Guiding requirements include setting a portfolio coverage goal to reach 100% of assets classified as aligned or net zero by 2040, and an engagement goal to achieve coverage of 70% of financed emissions from material sectors, rising to 90% by 2030. The toolkit is structured into key steps including portfolio analysis, setting alignment criteria, developing engagement strategies for priority companies, and establishing baseline voting policies.

Step 1: undertake portfolio analysis, set portfolio alignment goals and develop a stewardship prioritisation framework

Investors must identify which companies account for the majority share of financed emissions and classify them by alignment status. Material sectors are defined as those in NACE code categories A-H and J-L. Prioritisation criteria should be established to determine high-priority companies, considering factors such as total Scope 1, 2, and 3 financed emissions, net zero progress to date, the likelihood of successful engagement, and the risk of duplicative effort through collaborative initiatives. For bond investors, prioritisation may also consider the cycle of issuances and strategic openings for engagement.

Step 2: set net zero alignment criteria, alignment levels and time bound engagement objectives

Investors should establish core alignment criteria, including long-term ambition for net zero by 2050, short- and medium-term emissions targets, climate governance with executive remuneration links, and disclosed emissions performance. Additional criteria include decarbonisation strategies, capital allocation alignment, climate policy engagement, and just transition considerations. Companies are then placed on an ‘alignment staircase’ with levels such as ‘Not aligned’, ‘Committed’, ‘Aligning’, ‘Aligned’, and ‘Net zero’. Annual time-bound objectives should be set to move companies up this staircase, focusing on securing steep near-term emissions reductions.

Step 3: develop an engagement strategy for priority companies

Enhanced engagement for priority companies involves increased dialogue and clear escalation planning. Strategies should include explaining applicable expectations tailored to sector and geography, and communicating the timeframe for required actions. If progress is not achieved, investors should deploy escalation strategies. Non-voting escalation actions include letters to the board, public statements, filing shareholder proposals, or nominating new directors. In extreme cases, selling down or divesting may be considered a last resort when escalation has been exhausted or change is deemed infeasible.

Step 4: baseline engagement and voting policy approach

For the broader portfolio, investors must implement a baseline engagement and voting policy. This includes communicating net zero alignment expectations to all companies in material sectors. Voting should be linked to company-level objectives; for example, voting against the chair or relevant directors if a company lacks a 1.5°C GHG target. Specialist approaches are required for ‘Say on Climate’ votes, where investors should exercise caution and use clear evaluation criteria before endorsing transition plans. All voting decisions on priority companies should ideally be publicly communicated to provide impetus for change.

Step 5: asset owner and manager alignment, engagement and transparency

It is critical to reconcile alignment assessment frameworks and escalation actions across asset owners and managers. Asset owners should communicate company alignment expectations to their managers, potentially using templates that form an addendum to the Investment Management Agreement (IMA). This ensures consistency in reporting on Scope 1, 2, and 3 emissions, company alignment status, and key voting issues. A potential future ‘clearing house’ managed by IIGCC could serve as a central repository for alignment performance data, facilitating better coordination and reducing the burden on smaller asset owners.

Challenges and limitations

The approach primarily applies to listed equities and corporate fixed income. Key challenges include variations in sector prioritisation methods (such as GICS vs NACE), the growing importance and data gaps of unlisted assets like private equity and infrastructure, and jurisdictional hurdles in emerging markets. Future iterations of the toolkit will address these areas in more detail, including refined methodologies for Scope 3 emissions and sovereign-level engagement.