The Net Zero Asset Manager initiative (NZAM), which gathers asset managers with over $66 trillion of assets, is known as an ugly duckling of the net-zero alliances. Yet,  it still requires that its members publish 2030 decarbonization targets a year after they join. A batch of new targets were released yesterday, including one by Europe’s and France’s biggest investor Amundi. Reclaim Finance sounds the alarm about a flawed exercise that is becoming a smokescreen, and about the urgent need for clear guidelines from NZAM.

Asset managers committing to net zero is a useful exercise only if it fosters action to reduce the climate impact of their investments. But the NZAM guidelines for their members are extremely short and vague (compared to the NZAOA guidelines for example). What this means is that asset managers that commit to net zero are given a lot more leeway than other financial institutions in defining how they plan to reach their commitment. A recent Morningstar study underlines the huge difficulty in comparing asset manager targets (and the huge variance in their levels of ambition) leads to investor confusion and raises “questions about the reliability of any of the commitments and decarbonization targets”.

The NZAM’s overall approach to target setting requires new rules to make these targets useful. First, most NZAM members who have set targets have done so based on the emissions intensity of their portfolios — the emissions per invested dollar. This means that as the size of portfolios grows their emission intensity goes down without requiring any drop in actual emissions (1). Most targets also leave aside Scope 3 emissions, with very vague statements about including them once data is of good quality, which is an extremely problematic approach (2). Second, NZAM members’ headline targets are not based on actual reductions to their financed emissions (as is the case with the other alliances); instead they are based on the percentage of their assets under management (AUM) which is supposedly aligned to net zero. This percentage is supposed to reach 100% of assets by 2050 — but NZAM sets no interim requirements for the percentage of AUM that should be net-zero aligned in 2030 or any other year. Currently, the average percentage is at the low level of 39% (3). Finally, another problem is the ambiguity over the issue of when these “net-zero aligned” assets will actually lead to real-world emission reductions (4).

Among the 86 targets that were released yesterday: 

• Only 15 targets cover 100% of the assets of the firms.
• The 10 largest asset managers that released targets yesterday committed to align between 5% and 53% of their portfolio.
• The vast majority of the targets are intensity based (emissions per invested dollar) and don’t include scope 3 emissions.

The NZAM requires its members to publish information on their fossil fuel policies – and says as of today 71% of its members have such policies in place. But this information is a smokescreen: our analysis shows that most of these policies are not worth the paper they are written on.

Overall, because of the lack of any real guidelines, members’ current disclosures give little or no information on what they are doing now to start cutting the emissions they finance. Meanwhile climate science is clear what needs to be done to reach a 1.5°C objective: concrete actions must start with the fossil fuel sector to ensure no new projects are being developed. The UN’s High-Level Expert Group on Net Zero just confirmed again that net zero means no investments in new fossil fuels. But very few asset managers describe publicly what steps they are taking to stop supporting fossil fuel expansion and invest in a way compatible with an overall decrease in fossil fuel production (5). For example, Vanguard, one of NZAM’s biggest members, is still lacking any kind of fossil fuel policy, even for the coal sector. Its complete lack of real climate action raises questions on NZAM’s credibility.

Among the 86 targets that were released yesterday:

• Among the 10 largest asset managers that released targets yesterday, only 4 among them declare having a fossil fuel policy (6).
• 38 declare having no policy on fossil fuels but our analysis seems to show that this number should be bigger (we identified around 12 asset managers that declared having a policy while the policy mentioned covers only a very small part of their assets).
• Of the 48 that claim to have a fossil fuel policy: only 23 cover both the coal sector and the oil & gas sector. And the quality of the policies are extremely unequal, as each asset manager is able to define what it counts as a policy. Our analysis shows that only 1 of them has committed to fully exclude companies developing new coal mines or power plants, without exceptions (7).

For the NZAM to remain credible, it must urgently publish detailed guidelines on the minimum transparency and content requirements for fossil fuel policies. Or its members will keep being accused of what the UN’s net-zero standards report calls “using bogus ‘net-zero’ pledges to cover up massive fossil fuel expansion”

Our detailed analysis of 3 new targets:

Our analysis grid is comprised of:

• 3 key areas to assess the credibility of decarbonization targets and related implementation plans: ambition, alignment and implementation (details here)
• 2 indicators, focused on fossil fuel expansion, as climate science is clear that no new projects should be developed (9). They can help assess if concrete actions have already been taken by members.
  • Investment restrictions regarding the bond market: does the asset manager still provide fresh cash (including by buying new debt) to fossil fuel expansionists? (8)
    
  • Engagement or voting policy: Do engagement policies insist that portfolio companies stop fossil fuel expansion, and list clear time-bound sanctions for those who do not?

Notes :

1. At a nominal (non-inflation adjusted) average annual growth of 5% the emission intensity of a portfolio would drop by a third between 2022 and 2030 without any drop in real-world emissions; with a nominal return of 9% per year, an NZAM member could claim to hit the Race to Zero target of halving its financed emissions, with zero actual decrease in emissions.
2. Scope 3 emissions represent the majority of the emissions of fossil fuel companies. While the scope 3 reporting of companies may not be 100% reliable and accurate, studies show that these emissions are often widely underestimated rather than the opposite. Robust investor decarbonization targets must include scope 3 emissions where data is available and especially for priority sectors, such as those defined by the NZAOA.
3. https://www.netzeroassetmanagers.org/net-zero-asset-managers-initiative-announces-initial-targets-for-86-investors-as-total-number-of-asset-managers-committing-to-net-zero-increases-to-291/
4. It is unclear in some of the targets which steps must be taken before 2030, if any. For example, BlackRock has a seemingly respectable 2030 target of 77% of AUM. But dig down and it becomes apparent that BlackRock just requires 77% of AUM to be in companies with Science Based Targets (SBTs) “or equivalent” by 2030. So BLK can meet its target even if its investees increase emissions from now until 2029 and then announce they are going to set science based targets.
5. The engagement strategies often described to explain their actions on polluting companies are vague and lacking clear material demands linked to systematic sanctions.
6. J.P. Morgan Asset Management, Wellington Management, Sumitomo Mitsui Trust AM, Nomura Asset Management Co., Franklin Templeton Investments are among the largest asset managers in the new batch of targets and have declared having no fossil fuel policy.
7. BNP AM is the only one among the batch of 86 new targets.
8. While holding shares in a polluting company can help influence its strategy via voting rights, holding bonds and particularly buying newly issued bonds should be strictly restricted to companies that are not involved in new fossil fuel projects.
9. Consuming current fossil fuel reserves under exploitation and planned would exceed the remaining carbon budget for a 1.5°C or 2°C trajectory (see for example IPCC or Tyndall Research Center’s report)