By Hamish Stewart, Senior Associate, Climate Change, PRI & Rahnuma Chowdhury, Investor Climate Action Lead, UNEP FI

This blog highlights the need for high-level climate pledges to be accompanied by net-zero targets and detailed climate action plans and suggests ways for investors to turn bold pledges into action in 2022.

This year holds great potential for increased ambition of global capital markets to align with the climate change goals of the Paris Agreement. In particular, investors, banks and insurers are now working to align with the IPCC 1.5C scenarios, and the IEA’s Net-Zero 2050 scenario for the global energy system. In the lead up to COP26, more than 450 institutions responsible for over $130 trillion of capital committed to transition the global economy to net zero. These net-zero pledges were issued via a number of sub-sector net-zero investor alliances. PRI and UNEP FI convene a number these alliances including the Net-Zero Asset Owner Alliance (NZAOA), Net-Zero Asset Managers Initiative (NZAM), Net-Zero Insurance Alliance (NZIA), Net-Zero Banking Alliance (NZBA), and the Net-Zero Investment Consultants (NZICI).

Investors are now seeking to add credibility to their net-zero pledges. This will require portfolio-level targets and climate action plans via robust frameworks such as the NZAOA Target Setting Protocol, the Science-Based Targets Initiative Framework, and others. For investors, the climate action plans tool will be an important reference point. The Investor Climate Action Plans (ICAPs) framework provides a simple planning tool to get started with this process for both investors who have already set net-zero pledges and for those who seek to identify ways to operationalise them. It is also useful for investors who still need to create a more systematic approach to climate action before they are ready to set a net-zero target.

Turning 2050 targets into near-term investment and capital allocation plans

While implementation is not without hurdles, some members of the net-zero alliances are now making their climate pledges real with interim targets and structured climate action plans. A number of institutional investors and banks have committed to bring forward decarbonisation targets to 2030, with the NZAOA setting highly ambitious targets for as early as 2025. Over 100 of the world’s largest asset managers and asset owners have already set and publicly disclosed decarbonisation targets for 2025 or 2030.

Many financial institutions (FIs) are introducing operational changes at their own firms that are required to translate long-term emissions reductions targets into a real economy transition away from fossil fuel-based energy and towards sustainable energy sources. Investors who are leading on net zero are increasingly setting out technical and operational climate action in detailed plans.

Regulators turn up the pressure on net-zero targets and climate action plans

More of the global regulatory community is turning its attention to how FIs intend to take action on the voluntary pledges made at COP26. The UK Competition and Markets Authority Green Claims Code and the Financial Conduct Authority (FCA)’s evolving expectations on transition plans for financial institutions indicate that investors need to set targets and publish climate action plans to implement net-zero goals. This process will include more near-term targets and the integration of carbon pricing and other climate metrics into existing corporate financial reporting.

While some governments are still catching up with increased investor ambition, ratcheted up NDCs are expected in time for COP27. This should encourage all members of the net-zero alliances to turn their bold public pledges into concrete actions. In order to move the global economy towards net zero, investors need to set detailed quantitative, ambitious near-term targets, and publish plans to operationalise these targets.

Steps to operationalise climate pledges

Once targets are set, investors will need to develop implementation plans that involve board-level and executive management strategic planning. Backward-looking analysis will not be adequate to achieve progress on net-zero targets. The need for more action-orientated forward-planning will challenge incumbent CFOs, CIOs and executive management teams. Once targets are set, investors will need to develop plans to implement corporate action and asset allocation decisions.

ICAPs Expectations Ladder and business transition planning for net zero

The ICAPs Expectations Ladder and accompanying Guidance document provides investors with clear expectations for issuing and implementing comprehensive climate action plans and quantitative targets across the following key areas: investments, corporate engagement, policy advocacy, investor disclosure and governance.

Climbing the ladder

The ICAPs Expectations Ladder outlines a process for setting and implementing high-ambition, robust net-zero actions for investors wherever they are at on their climate journey. It does so by setting out clear expectations for investors across a “ladder” of four tiers denoting increasing levels of ambition with Tier 4 for those just starting to take action on climate to Tier 1, which is for the net-zero leaders. The tiering system is perhaps most valuable as a pathway for investors who are not yet committed to net zero to systematically progress towards increasing ambition until they reach Tier 1 and are able to join the sub-sector alliances. The Expectations Ladder helps investors meet and implement the Race to Zero criteria.

ICAPs is linked to a range of resources produced by the investor net-zero alliances. As a result, ICAPs is aligned to and, indeed, complementary to initiatives such as NZAOA and NZAM. For example, while target setting frameworks such as the NZAOA Protocol and SBTi’s forthcoming approach give guidance on ‘targets’, Investor Agenda ICAPs are the place to find the appropriate guidance on robust and detailed ‘plans’ to implement these. Investors may use ICAPs to:

  • Develop a standalone climate action plan and/or net-zero transition plan to operationalise climate pledges, and targets
  • Assess their current approach to managing climate change risk and opportunity to benchmark areas where they have made progress on climate and areas for further improvement
  • Communicate their current activities and future plans to stakeholders
  • Understand what elements of the ICAPs to embed into their existing climate change strategies and disclosures, including TCFD disclosures, board compensation packages, target setting strategies in sustainability report.

As indicated by the final point above, ICAPs Expectations Ladder are not intended to be an additional reporting requirement for investors. Instead, they are predominantly intended to help investors identify clear actions they can take to start or rapidly accelerate their journeys to net zero.

In order to help investors get on and then climb the ICAPs Expectations Ladder towards net zero, PRI and UNEP FI will be running a series of ICAPs masterclasses in April, June, and September. The workshops will focus on targeted areas of climate action such as stewardship action on sector pathways and policy engagement and advocacy. COP26 proved that the financial sector is ready to commit to net zero. As the world prepares for COP27, now is the time to turn those commitments into action.

Key terms
  • A net-zero pledge/commitment – a pledge is a statement by the head of the organisation to reach net zero by 2050 or sooner.
  • A net-zero target – a target is a short-term (2025, 2030, and so on) quantitative goal which in our view should align with decarbonisation requirements by IPCC to be credible.
  • A climate action plan – a plan is a detailed, comprehensive, and transparent narrative and set of actions which will enable the financial institution to meet its target. All credible plans must be centred on concrete targets.

If you would like to learn more about Investor Climate Action Plans, including the Investor Agenda ICAPs Masterclass workshop series, please get in touch here.