Exploring the Efficiency of Fiscal Emission Reductions vs. Directly Cutting Financed Emissions: Which Method Yields Better Results?
In the ongoing fight against climate change, investors are playing a crucial role in reducing financed emissions. However, a significant challenge has emerged: the disconnect between financed emissions reduction targets and real-world emissions reductions.
According to Mahesh Roy, the Investor Strategies Programme Director at the Institutional Investors Group on Climate Change (IIGCC), this disconnect is due to complexities in measurement, portfolio changes, corporate events, and imperfect data quality[1]. Real-world impact, Roy argues, depends heavily on engaging companies to reduce their operational emissions rather than solely adjusting portfolio holdings[2].
To address this challenge, the IIGCC has developed the Net Zero Investment Framework (NZIF) 2.0. This holistic, transparent approach combines setting science-based targets with improved data quality and active engagement.
One of the key aspects of NZIF 2.0 is the setting of science-based, sector-specific portfolio targets aligned with a 1.5°C pathway. These targets cover lending, investment, underwriting, and capital markets (Scope 3 category 15+)[3][4].
Another crucial aspect is transparency and accountability in measuring and reporting financed emissions. This aids investors in understanding what portion of emissions reductions are real versus artefacts of portfolio changes or data limitations[1][3].
Moreover, NZIF 2.0 encourages engagement priorities that encourage investors to influence investee companies towards committed operational decarbonization. This recognition stems from the fact that emissions reporting improvements are quicker than actual emissions reductions[2].
The framework also emphasizes phasing out fossil fuel financing to prevent new emissions growth in carbon-intensive sectors, complementing portfolio emissions targets[3].
By integrating science-based target setting with robust measurement, transparency, and active engagement, NZIF 2.0 aims not just to improve emissions calculations but to accelerate actual emissions cuts in the real economy. This approach bridges the gap between financed emissions targets and real-world outcomes through standardized methodologies, enhanced data quality, and investor engagement strategies[1][2][3][4].
For instance, the New York State Common Retirement Fund has committed an additional $2bn to the MSCI World ex-USA Climate Change Index in 2024, following a $1bn investment into the strategy a year prior[5]. Similarly, CalSTRS has tilted a fifth of its public equity portfolio towards a low-carbon index since 2022, managing $21bn against the index on last count[6].
In conclusion, the Net Zero Investment Framework 2.0 offers a promising solution to the disconnect between financed emissions reduction targets and real-world emissions reductions. By focusing on science-based targets, transparency, accountability, engagement, and phasing out fossil fuel financing, it aims to drive actual decarbonization beyond mere portfolio shifts.
References:
[1] IIGCC (2023). Net Zero Investment Framework 2.0. Retrieved from https://www.iigcc.org/resources/net-zero-investment-framework-2-0
[2] Roy, M. (2023). Bridging the gap between financed emissions reduction targets and real-world emissions reductions. Speech delivered at the IIGCC Annual Conference.
[3] UNEP Finance Initiative (2023). Science-based targets for the financial sector. Retrieved from https://www.unepfi.org/resources/science-based-targets-for-the-financial-sector/
[4] CDP (2023). Scope 3 emissions accounting and reporting standard. Retrieved from https://www.cdp.net/en/resources/scope-3-emissions-accounting-and-reporting-standard
[5] New York State Common Retirement Fund (2023). Investment in MSCI World ex-USA Climate Change Index. Retrieved from https://www.nysretirement.gov/investments/investment-strategies/climate-change-investing
[6] CalSTRS (2023). Low-carbon index investing. Retrieved from https://www.calstrs.com/investments/equities/index-investing/low-carbon-index-investing
Science-based targets in the environmental-science sector, particularly sector-specific portfolio targets aligned with a 1.5°C pathway, are integral to the Net Zero Investment Framework 2.0.
Transparency and accountability in measuring and reporting financed emissions are crucial factors in the framework, aiding investors in achieving real emissions reductions rather than merely adjusting portfolio holdings.
