The UN-Convened Net-Zero Asset Owner Alliance (AOA) has released an updated version (1) of its target-setting protocol, its detailed set of guidelines for its members. The AOA is generally the most ambitious of the seven sectoral alliances under the umbrella of the Glasgow Financial Alliance for Net Zero (GFANZ). Unfortunately while there are some useful additions in this update, it also weakens the percentage emissions reduction targets for its members’ portfolios and fails to make significant progress on the issue of ending finance for oil and gas supply expansion. The AOA must make clear and robust recommendations on ending support for oil and gas expansion in its upcoming oil and gas position paper.

The AOA is committed to updating its detailed target-setting protocol on an annual basis. This is the third version of the protocol (2). Its new elements include guidance on target-setting for private equity and a discussion on the just transition aspects of decarbonization.

The AOA requires its members to set targets for engaging with investees, asset managers and governments. They must also set at least two out of three other types of targets: increasing transition finance; reducing financed emissions from sub-portfolios (asset classes such as publicly-listed stocks, corporate bonds, private equity, and infrastructure); and/or reducing emissions from high emitting sectors such as oil and gas, and utilities. The AOA’s most recent progress report, published in October 2021, showed that 42 out of 44 AOA members who had set targets by mid-2021 had chosen sub-portfolio targets. Just nine had set sectoral targets.

Given the importance of these sub-portfolio targets, it is disheartening that the AOA has reduced the acceptable range of ambition for these targets in 2030. Last year’s protocol required AOA members to reduce their sub-portfolio emissions by at least 49% (3). This year, however, the AOA has reduced this minimum to 40%.

The justification given is that this lower range is consistent with the 75/25 interquartile range of the 1.5°C low or no overshoot pathways for CO2 in the most recent International Panel on Climate Change (IPCC) report (4). But given that AOA members had already accepted a pathway to at least 49% reductions by 2030; that the median of these IPCC pathways is 48%; and that these pathways give only a 50% chance of keeping warming at 1.5°C, it is completely contrary to the AOA’s claims of commitment to “ambition” and “leadership” (5) for them to reduce the minimum level of emission reductions their members must achieve in their portfolios by 2030 to just 40%. Furthermore, if AOA is indeed committed to a global just transition, its members, which are overwhelmingly in the global north and mostly invested in global north assets, should surely aim to go higher than the median of IPCC 1.5°C pathways.

The previous version of the protocol took a first step toward requiring its members to stop financing fossil fuel expansion (6). The protocol said that targets for the oil and gas, and utility, sectors should “withdraw financing from new coal-related assets and new oil and gas fields.” It also said that direct investments in infrastructure (one of the “sub-portfolio” asset classes) should exclude financing for “upstream greenfield” oil projects.

While it is positive to see this language in the protocol, according to the alliance’s most recent progress report, only five member have set oil and gas targets, and the same number utility targets. Meanwhile only one asset owner is reported to have set an infrastructure target.

Over the past year the conclusion that there is no room in the 1.5°C carbon budget for new fossil fuel supply projects has been repeated by the Race to Zero, the IEA’s 2023 World Energy Outlook, and the report of the UN’s High-Level Expert Group on net zero (7). It was therefore logical to have assumed that the new protocol would promote meaningful action on expansion financing. Sadly this has not happened. The new protocol merely repeats the same language on fossil fuel expansion from last time. No progress has been made on this vital issue.

One area where some progress has been made in this protocol is carbon removals. The new protocol is clear that investee companies can only use negative emissions to meet their targets if these use long-term storage according to the Oxford Principles on offsetting (8), which defines long term as “centuries to millennia.” This which would rule out the use of “nature-based” removals with their many methodological and social and ecological impact problems.

Unfortunately some key methodological problems in the previous protocols remain unresolved: for both sub-portfolio and sectoral targets investees must “track” their Scope 3 emissions, but these do not need to be included in targets. Similarly, absolute emissions must be reported for sectoral targets, but the targets can be set only with intensity metrics. Sub-portfolio targets can also be set only with intensity metrics. Absolute emissions do not even need to be reported for these targets.

The AOA came out with a coal position paper (9) in November 2020 which said that “no further thermal coal power plants should be financed, insured, built, developed or planned.” The sections of the 2022 protocol on oil and gas infrastructure and sector targets implied that the issue of financing expansion would be addressed further in a “forthcoming position paper” on oil and gas. This forthcoming oil and gas paper should send the same strong message on oil and gas expansion (10). One year later and this paper is yet to be published, and the same language is in the new protocol. The paper however is reportedly finally very close to being released.

Notes:

1. Read “Net-Zeo Asset Owner Alliance raises expectations for member’s real economy impact with updated protocol“.
2. The other GFANZ alliances convened by the UN Environment Programme, have only committed to reviewing their guidelines after two years (insurers), or even three years (banks). The alliance for asset managers, meanwhile, which is convened by a group of investor-based NGOs, has made no formal pledge to update its (extremely brief) commitment statement.
3. This range was roughly aligned with the UN Race to Zero campaign’s requirement for its partners (which include the AOA) to contribute a “fair share” of a 50% global cut in CO2 by 2030.
4. IPCC Sixth Assessment Report, Working Group III, April 2022
5. AOA, The 2nd Progress Report of the NZAOA, p.9
6. The language on fossil fuel expansion was based on the conclusions of the International Agency’s Net Zero Emissions (NZE) scenario and of the One Earth Climate Model developed by the University of Sydney (and supported financially by the AOA).
7. AOA chair and founder Günther Thallinger was a member of HLEG. The new protocol states that the AOA will consider the HLEG recommendations in the next version of the protocol.
8. Read “The Oxford Principles for Net Zero Aligned Carbon Offseting”, The Oxford University
9. Read AOA’s report “Alliance Thermal Coal Position”
10. AOA, The 2nd Progress Report of the NZAOA, p.50