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The net-zero problem: We're not going far enough

The following op-ed was published in Investment Week on November 5, 2021.

There is a growing inescapability for private sector actors and governments to address climate change efficiently and enable a real-economy transition towards a world on a 1.5ºC pathway.

The trend towards net-zero commitments has grown impressively in recent years, arguably well beyond what many could have imagined when the Paris Agreement was signed six years ago.

Today, close to two-thirds of the world's countries and a fifth of all major companies have made a net-zero pledge of some kind. With a focus at COP26 on the role of finance in the transition, much has been made about the responsibility of asset owners and managers too.

Progress is being made, with many showing that they are ready to work on sustainability targets at the level of financial targets, and aid the long-term transformation of the economy. Notably, the UN-convened Net-Zero Asset Owner Alliance has grown in just two years from 12 members ($2.4trn AUM) to 60 investors ($10trn AUM), and significantly expanded into Japan this year bringing on four large insurers.

However, as investors, we are not yet going far enough. We need to show that we are prepared to lead the way by first changing ourselves and adding substance to net-zero commitments. Herein lies the current problem.

As investors, we must lead by example and align investment portfolios to a net-zero greenhouse gas emissions trajectory by 2050. But while we know that commitments can drive action, these commitments alone do not guarantee progress.

No time like the… future?

There is an argument that commitments to 2050 are, in effect, 'kicking the can down the road'. The deadlines in place for many investors, corporates and even countries are comfortably far off. When the clock ticks down and these commitments need to be made good, it will likely be someone else's problem.

A recent analysis of corporates in highly polluting industries plotted the time to net zero against the average tenure of those CEOs setting net-zero targets. The research found that most businesses will have made their way through at least four chief executives before the deadline. Though of course the majority of these pledges are made with the best of intentions, long-term commitments do not move the needle fast enough and run the risk that current CEOs bequeath a poisoned chalice to their successors.

For investors, while portfolio decarbonisation is not the end goal in itself, it is a tool to achieve decarbonisation of the global economy and ensure the green transition in a timely manner. Asset owners, like company directors, have a responsibility to identify and mitigate these risks to which their assets, or organisations, are exposed. Equally, they must recognise the immense opportunities for net-zero investment as value chains are radically transformed. Bluntly, asset owners and other investors have a fiduciary duty and therefore must improve on net-zero 2050 commitments.

Interim targets driving real-world change

Setting intervening years as interim decarbonisation target deadlines has far greater utility to asset owners and the world at large. Just before COP, the members of the Net-Zero Asset Owner Alliance set a compelling example in this regard in its Progress Report. This is the first time a large group of institutional investors has set decarbonisation targets in line with the IPCC 1.5-degree pathways - and they are leading by example.

At the beginning of 2021, the Alliance delivered a clear framework for how a dedicated group of actors can turn ambitious long-term commitments into interim targets. Asset owners that use this Protocol are set to deliver on their ambition to align with net-zero targets for 2025, and - crucially - are guided in the immediate term with rolling intermediate targets.

This is the decisive decade. Short-term, science-based targets must be set, timed for 2025 or 2026. For first targets, 2030 is very late indeed.

These critically important actors are carefully balancing scientific ambition, active ownership engagement and divestment constraints with individual responsibilities, risk profiles, the decarbonisation trends of the global economy, and market opportunities specific to each Alliance member and their unique market environment.

The results so far are encouraging. Twenty-nine asset owners including Allianz, CDPQ and Swiss Re are already exceeding expectations by pledging average emissions reductions in three major asset classes by over 25% within five years. The decision-making process at these investors is truly enhanced. These members work on changing themselves first to then reach out to others to support them in their transformation.

In a sense, the collective is putting its money where its mouth is, demonstrating that asset owners can and must ask of themselves what they of the real economy companies that they invest in. Interim decarbonisation targets from asset owners are leading to clear actions and real-world outcomes today. Theirs is a blueprint for others to follow at COP26 and as policy-based changes to the global financial system are discussed and implemented.

Günther Thallinger is a board member of Allianz SE and chair of the UN-convened Net-Zero Asset Owner Alliance

Related information

The Allianz Group is one of the world's leading insurers and asset managers with 120 million* private and corporate customers in more than 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 802 billion euros on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage 1.9 trillion euros of third-party assets. Thanks to our systematic integration of ecological, social and governance criteria in our business processes and investment decisions, we hold the leading position for insurers in the Dow Jones Sustainability Index, launched on 12.11.2021. In 2020, over 150,000 employees achieved total revenues of 140 billion euros and an operating profit of 10.8 billion euros for the group.

These assessments are, as always, subject to the disclaimer provided below.

*Including non-consolidated entities with Allianz customers.
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The net-zero problem: We're not going far enough

In an op-ed in Investment Week, Günther Thallinger, a member of the Board of Management of Allianz SE and chair of the UN-convened Net-Zero Asset Owner Alliance, argues that while progress has been made in getting governments and companies to set long-term decarbonization targets, it is interim targets that will lead to real world outcomes.