Investors targeting net zero portfolio emissions under their commitment to the $11 trillion Net Zero Asset Owner Alliance (NZAOA) will no longer be able to utilize carbon removals as a method to reach their alliance-aligned goals, according to new rules released by the organization. The alliance’s more stringent requirements will also require members to set climate goals for additional asset classes such as private equity investment.

Founded in 2019, the NZAOA is a UN-convened, member-led initiative of institutional investors committed to transitioning their investment portfolios to net-zero GHG emissions by 2050. The organization has grown to 84 members with over US$11 trillion in assets under management.

The new requirements form part of the NZAOA’s third edition of its Target Setting Protocol, which aims to guide alliance members in setting science-based targets on their financed emissions in order to enable alignment with IPCC pathways to keep global warming below 1.5°C.

The guidelines set out requirements for signatories to set climate goals for their portfolios, including emissions reduction targets for underlying portfolio holdings (“sub-portfolio targets) in the range of -22% to -32% by 2025 and -40% to -60% by 2030, as well as targets for high-emitting sectors.

One of the most significant changes under the new rules is the elimination of the ability of alliance members to use carbon removals to achieve their targets. Although the landmark IPCC climate change mitigation study released last year identified carbon removal as a key tool to limit warming to 1.5°C, the NZAOA stated that “with carbon removal technologies yet to impact at scale,” it would disallow their use towards the goals. The protocol also guides members to encourage investee companies to prioritize emissions reductions.

Despite the rules for members, the protocol still recognizes that the carbon removal market “is important for accelerating decarbonization,” and encourages members to “contribute to a liquid and well-regulated carbon removal certificate market before 2030.”

Additional new requirements under the protocol include expanding asset classes covered by members’ commitments. Noting that setting decarbonization targets for private equity portfolios has been challenging due to a lack of data for unlisted equity, the protocol introduces a methodology for direct private equity investments and a requirement to set targets for these investments this year, and for all private equity assets by 2025.

The new protocol also includes guidance on carbon accounting for sovereign debt, and asks members to phase in target-setting on new commercial real estate loans.

The protocol also adds a section on the Just Transition, for the first time requiring members to consider societal impacts of shifting their portfolios towards net zero, and ensuring that the benefits of the low carbon transition are fairly shared, with a particular focus on emerging markets.

NZAOA Chair and Allianz SE Board Member Günther Thallinger said:

“The Alliance continues to enhance depth and coverage with each edition of the Target Setting Protocol, aiming to build a coherent, consistent trajectory aligned to the demands of latest climate science. We show that working towards net zero is possible. It is a matter to decide to do so.”

Click here to access the new NZAOA protocol.