Introduction

The UN-convened Net-Zero Asset Owner Alliance (Alliance) represents asset owners managing more than USD 9.5 trillion. Members commit to transitioning their investment portfolios to net-zero emissions by 2050, with intermediate targets set every five years in line with the Paris Agreement. These targets are based on pathways from the Intergovernmental Panel on Climate Change (IPCC) and can be set using absolute or intensity-based Key Performance Indicators (KPIs). The Alliance plays a vital role in allocating capital towards a low-carbon transition through strategic investments, stakeholder engagement, and promoting reporting standards.

The question, purpose, and approach

The report explores what drives the decarbonisation of investment portfolios, particularly the factors influencing absolute or relative reductions in financed emissions. Key drivers include:

• Real-world emissions reductions by investee companies.
• Portfolio reallocation towards companies with net-zero targets.
• Divestment from companies not taking action against climate change.
• External factors such as changes in company value or revenue.

The report also introduces emissions attribution analysis as a tool to incentivise investment managers to support companies with ambitious transition plans, with the ultimate goal of reducing emissions in future portfolios.

Methodologies and an output example

The Alliance discusses two primary approaches to emissions attribution:

• Partial equilibrium approach:
  • Focuses on the impact of a single variable on the overall carbon metric while keeping other variables constant.
  • Simple to implement and intuitive but does not account for interaction terms between variables.
  • Does not easily inform engagement dialogues or discussions with investment managers.
• Three-layer approach:
  • Splits the calculation into multiple layers to better understand decarbonisation drivers.
  • Takes into account interaction terms, providing a more accurate view of changes in exposure, emissions, and enterprise value.
  • Better suited for informing stakeholder dialogues and detailed portfolio analysis.

These approaches allow asset owners to assess the drivers of emissions reductions and inform their decision-making on portfolio management.

Discussion

One challenge highlighted is the difficulty in measuring the impact of capital allocation strategies on real-world emissions reductions, particularly when it comes to stakeholder engagement and field building activities. However, the impact of capital allocation on decarbonisation is easier to measure and disaggregate. The report stresses the importance of including all levels of investment portfolios—individual mandates, entity levels, and group portfolios—when calculating carbon footprints. It also recommends:

• Improving data quality and transparency.
• Separating technical issues like data gaps from the main drivers of portfolio decarbonisation.
• Collaborating with stakeholders to address data quality challenges.

The “consensus approach” and boundaries

The “consensus approach” recommended by the Alliance is a reference model that decomposes financed emissions into several drivers. While not mandatory, it is seen as a favourable approach for most asset owners. Key points include:

• Aggregating new investments, divestments, and changes in exposure for a simplified model.
• Limiting analysis to listed corporates, bonds, and equities due to data challenges in other asset classes.
• Focusing on tangible reductions in greenhouse gas emissions rather than external influences like exchange rates.

Conclusion

Emissions attribution analysis offers valuable insights into investment portfolio decarbonisation and progress towards net-zero targets. By identifying the key drivers of portfolio carbon changes, asset managers can make more informed decisions about their investments and better understand how their actions impact the real economy. The Alliance recommends that asset owners and managers implement emissions attribution analysis to provide transparency and support the achievement of climate goals.