The Net-zero Asset Owner Alliance (NZAOA) brings together 33 institutional investors who have pledged to transition their investment portfolios to net-zero GHG emissions by 2050 and to act to reduce greenhouse gas emissions through engagement with companies and with public bodies. The Alliance has just published its “Inaugural 2025 Target Setting Protocol” which provides guidelines to its members on how to prepare and present their targets for 2021-2025, and their annual reports against these targets.

These guidelines are important as it is crucial for big investors to get around the table and use their collective power to shift the terrain of climate action. The NZAOA is a good example of an investor initiative that could have the potential to set industry standards and get others moving. Unfortunately, the Protocol contains several major loopholes which could significantly limit the impact of the Alliance members’ 2025 targets and weaken the ambition of the initiative, unless individual asset owners choose to show leadership by aiming higher.

The Protocol sets out a menu and format for how Alliance members should produce individual plans to reduce the carbon intensity or absolute emissions from their portfolios, and to engage with companies they co-own. It commits each Alliance member organisation to set out ambitions for 2025 that cover:

  1. Engagement targets with companies and policy-makers (mandatory for all members)

Plus two of the following three ‘tracks’:

  1. Sub-portfolio emission targets;
  2. Sector emission intensity-based reduction targets;
  3. Climate-positive investment targets

1. The NZAOA favors engagement without linking it to a clear escalation strategy that could result in divestment:

  • Engagement targets are the focus of the Alliance’s recommandations, as they are the only mandatory ‘track’ among the 4 outlined. It is striking that the guidelines do not specify that meaningful engagement goes hand in hand with the definition of time-bound specific demands and – if they are not met – a public escalation process that leads to divestment by a precise date.
  • Divestment strategies are sidelined by the Protocol, as the Alliance seems to consider divestment as opposed to engagement strategies, rather than complementary. Furthermore, the Protocol stresses the need to verify compatibility with “antitrust and other regulatory laws and regulations” as another limitation to the adoption of exclusion policies. It remains unclear what this refers to exactly and if it could be used to justify inaction.
  • While it is good to see the Alliance referring to the EU Green Taxonomy, it is also important to remember that investing in green-oriented companies does not result in fewer investments in high carbon activities. Remaining invested in companies which still have expansion plans in fossil fuels is a clear signal that the investor is not taking seriously the limited carbon budget we have to remain in a 1.5°C pathway.
  • As a reminder, divestment already contributed to increasing the cost of capital for oil and gas companies, thus aiding the shift to a low carbon economy. Divestment is one of the key drivers of the move away from coal.

2. The NZAOA allows its members to gamble on negative emissions, thus jeopardizing the objective to keep global warming below 1.5°C:

While the Alliance does recommend the use of scenarios with limited overshoot of global temperature rise of 1.5°C, it is worrying to notice that it has been considered in the Protocol that relying on large amounts of negative emissions technologies is still an option given to its members. In the first pages of the Protocol, it is now stated that, for setting sub portfolio targets, the Alliance considers IPCC P1, P2 and P3 pathways to be the “best available” science. The P3 scenario, known as a “middle-of-the-road scenario”, requires a relatively large amount of BECCS (Bio-energy with carbon capture and storage). This is particularly worrying as the mass deployment of carbon removal solutions – such as BECCS – is highly unlikely.

3. The NZAOA does not require its members to set absolute reduction targets:

If the NZAOA clearly states its preference for absolute targets, its members are not required to set them. Setting absolute targets should be mandatory and intensity target encouraged, and not the other way round Intensity targets can enable carbon intensive companies – like fossil fuel majors – to maintain or even increase absolute emissions. Total has previously reduced its emission intensity but increased its overall emissions, through an increased production of fossil fuels. But investors seem to have pushed back on this point via their feedback to the Alliance.

4. The NZAOA says nothing about fighting anti-climate lobbying from its investee companies or interest groups:

The NZAOA Protocol sets rules on engagement with investee companies and in the public policy sphere. However, it does not push its members to act against companies that would engage in anti-climate lobbying. NZAOA members should ensure that their investee companies or the lobby groups they are sitting in do not engage in anti-climate lobbying. They should pledge to divest from these companies and exit these groups if they do not cease their climate destructive lobbying, after a one-year engagement period.

5. Strategies to push back responsibilities

The cautious wording and the inclusion of additional references in the final version of the Protocol show a clear desire to leave total latitude to the Alliance members, increasing the risk of unambitious targets. The document includes 13 mentions of warnings for members to comply with “antitrust and other regulatory laws and regulations”, including regarding divestment strategies.

As one of the common pushbacks for investors unwilling to include climate considerations in its investment choices, fiduciary duty regulations are often put forward. This is a clear misunderstanding of what it means to “act in the best interest of clients”, as ESG factors are fully part of a prudent investment process. Fossil fuel divestment is in no way incompatible with fiduciary duty obligations, especially regarding the huge financial risks linked to fossil fuel companies and coal developers.

Furthermore, the definition given of fiduciary duty (1) is inappropriate as it does not cover the variety of ways to best serve clients interests. It must also be reminded that this legal concept is a process test requiring a long term approach to ESG issues.

More generally, it should also be remembered that only three of the four ‘tracks’ of the Protocol are mandatory (2), which allows members for example to not set any portfolio targets. Hopefully, as the Protocol only sets the floor for minimum requirements and a foundation on which members can build, individual asset owners will choose to do more and start paving the way for the Net Zero Asset Owner Alliance to become the spark for ambitious action it could be.

Our original contribution to the consultation on the draft version of the Protocol (10/11/2020)


  1. Page 60 of the Protocol.
  2. The tracks are: engagement targets, sector targets, sub portfolio emission targets, and financing transition targets.