The ILN Launches its Net Zero Investor Playbook

The Investor Leadership Network (ILN) released a Net Zero Investor Playbook which offers an inventory of approaches institutional investors are taking to transition investing and highlights key challenges:

TORONTO | Sept. 21, 2022 –– The Investor Leadership Network (ILN) launched today a new resource to provide practical assistance to investors and their stakeholders to operationalize their net zero commitments. Created with the support of KPMG LLP, the Net Zero Investor Playbook inventories institutional investors’ current approaches to and highlights the complexity of climate transition investing.

Global organizations have developed a wide range of net zero frameworks, methodologies and tools to help investors design and implement their net zero transition programs. The continuously expanding collection of resources and concurrent advances in underlying climate models, however, have caused some confusion on how best to position portfolios and engage with portfolio companies to deliver on real world carbon emissions reduction.

“Institutional investors have a significant role to play in financing long-term, real economy emissions reductions, while also reducing their portfolios’ reported emissions in the near term. This can be a tough balancing act,” ILN CEO Amy Hepburn says, “so we’re thrilled to provide investors with guidance on how they might begin to navigate the complexity of transition investing.”

The Net Zero Investor Playbook summarizes of the wide range of approaches to transition investing that investors are taking and categorizes them into four themes:

1. Portfolio emissions forecasting and target setting
2. Alignment with broader portfolio construction and risk parameters
3. Portfolio transition taxonomies
4. Portfolio holdings’ transition capacity metrics.

Within each of the four themes, the Playbook synthesizes the current landscape of relevant investor-specific frameworks and methodologies, the related implementation challenges being experienced by investors, and anticipated enhancements to available guidance that will assist investors in moving forward. To complement the report’s analysis, case studies from individual ILN members on their customized implementation approaches are featured.

The Playbook is the ILN Climate Change Advisory Council’s fourth open-source resource created by investors, to address various aspects of incorporating climate change risks and opportunities into investment processes.

Maria Montero, Principal in CPP Investment Board’s Sustainable Investment Group and Co-Lead of ILN’s Climate Change Committee says, “We believe navigating the risks and opportunities presented by the whole economy transition required by climate change will be a defining challenge of the 21^st century. Investors can play an active role in financing real economy emissions reductions and as a result reduce financed emissions. This report draws on practical case studies from ILN’s membership to provide a helpful overview of approaches that long-term investors, like us, can take to steward our portfolios to net zero.”

Nathalie Wallace, Global Head of Sustainable Investing and Co-Lead of ILN’s Climate Change Committee adds, “This report outlines the challenges and key considerations investors need to take into account as they embark on the Net Zero journey. Our work with clients shows that it remains a path riveted with uncertainties and critical decisions. But this Playbook will help investors in their decision-making process to reach their dual objectives of decarbonizing and positioning portfolios to benefit from the powerful investment opportunities driven by the transition to a net zero economy.”

• Access the full Playbook
• Access the Executive Summary
  

About the Investor Leadership Network

The Investor Leadership Network was launched at the 2018 G7 to facilitate and accelerate collaboration by leading institutional investors on key issues related to transitioning to a sustainable and inclusive global economy. The CEO-led group comprises 13 global institutional investors representative of all continents and assets classes, with over US$10 trillion in assets under management. Learn more about the Investor Leadership Network by visiting our website and following us on Twitter @ILNinfo.

The ILN's Net Zero Investor Playbook can be downloaded here and the executive summary is available here.

As a reminder, the ILN is an open and collaborative platform for leading investors interested in addressing sustainability and long-term growth.

The Investor Leadership Network was launched at the 2018 G7 to facilitate and accelerate collaboration by leading institutional investors to drive the transition to a sustainable and inclusive global economy. As the leading network of investors taking action for people, planet and prosperity, the CEO-led group is composed of 13 global institutional investors representative of six countries, with over US$10 trillion in assets under management.

Operating as an open and collaborative platform, members pool resources, expertise, and networks to develop, promote and deliver action-based and scalable initiatives on major global issues such as climate change, equity, diversity and inclusion, and sustainable infrastructure. Every initiative is evidence-based, measurable, and drives macro change. Member commitment is leveraged through a central convening body, the Secretariat, that threads the needle among initiatives and tracks and reports impact.

The ILN benefits from the participation and support of various partners, including governments, foundations, nonprofits, multilateral institutions, and other industry bodies, while remaining fully autonomous.

Last November, Blake Hutcheson, President and CEO of OMERS, and Marc-André Blanchard, Executive Vice-President and Head of CDPQ Global and Global Head of Sustainability, were appointed Co-Chairs of the ILN CEO Council, effective January 1, 2022. They succeeded Charles Emond, President and CEO of CDPQ who was the former Chair.

I encourage you to view ILN's latest news here.

The Net Zero Investor Playbook is an important resource for all investors and it follows the Inclusive Finance Playbook which was released earlier this year, providing investors with the business case for inclusion, inclusion metrics, and case studies on how ILN members are beginning to put the metrics into practice (see press release here). 

As stated in the press release above, the Net Zero Investor Playbook summarizes the wide range of approaches to transition investing that investors are taking and categorizes them into four themes:

1. Portfolio emissions forecasting and target setting
2. Alignment with broader portfolio construction and risk parameters
3. Portfolio transition taxonomies
4. Portfolio holdings’ transition capacity metrics.

Within each of the four themes, the Playbook synthesizes the current landscape of relevant investor-specific frameworks and methodologies, the related implementation challenges being experienced by investors, and anticipated enhancements to available guidance that will assist investors in moving forward. To complement the report’s analysis, case studies from individual ILN members on their customized implementation approaches are featured.

It is worth reading the Executive Summary below:

The role that institutional investors play in supporting the global economy’s transition to net zero emissions by 2050 is complex, but significant. Investors as well as other financial services organizations are being strongly encouraged to not only reduce their portfolios’ reported financed emissions, but to also strategically incorporate the financing of real economy emissions reductions within their net zero approaches. 

A wide range of relevant net zero frameworks and methodologies have been developed by global organizations, intended to assist investors in understanding, developing, and progressing their net zero programs. However, the continuously expanding range and diversity of this guidance, and the concurrent scientific advances in underlying climate models, has required investors to apply an exceptional level of innovation and customization in developing, implementing and updating net zero approaches that align with their own mandates, as well as their clients’ mandates where relevant. 

Adding to this high degree of complexity, investors face a number of practical challenges. They are having to navigate the balancing act of demonstrating near term impact (e.g. against 5 and 10 year interim targets) while confronting significant data constraints, evolving definitions (e.g. of ‘material’ sectors) and shifting climate science (including the shift from ‘below 2°C-based targets’ to ‘maximum 1.5°C-based targets’ triggered by Intergovernmental Panel on Climate Change special reports).

Within each of the four themes highlighted below, the report synthesizes the current landscape of relevant investor-specific frameworks and methodologies, the related implementation challenges being experienced by investors, and anticipated enhancements to available guidance that will assist investors in moving forward. To complement the report’s analysis, case studies from individual ILN members on their customized implementation approaches are featured. 

Significant efforts have been made since 2020 to mobilize the world’s capital providers to finance the low-carbon transition, for example through the Global Financial Alliance for Net Zero (GFANZ). The sector-specific alliances and initiatives under the GFANZ umbrella each have specified rigorous commitments for their signatories to take on. Many other asset owners and managers have made net zero commitments outside of this umbrella. 

As a result, an enormous level of collective willpower has been mobilized among major financial services players. However, willpower alone won’t solve for the unprecedented complexity of fundamentally transforming the global economy in the face of cascading systemic risks. 

The report concludes that the net zero transition of the global economy is still in its early stages, with a number of pressing challenges still to be addressed. In particular: 

• Significant additional collaboration and convergence of approaches will be required among investors and other financial institutions, governments and regulators, corporates, global framework developers, ESG data providers and society at large, to better align efforts and achieve the real economy emission reductions necessary to limit average global warming to 1.5°C. 
• Achieving real economy emission reductions is also dependent on the ability of transition actors to address ongoing economic, political, social, and technological disruptions (e.g., heightened geopolitical tensions, a renewed focus on energy security and independence, climate migration, and worsening income inequalities). If these disruptive forces are unable to be solved for, various market dislocations could occur and overtake efforts to achieve real economy decarbonization. 
• Meaningful collaboration between institutional investors and government entities will be required to advance sensible and effective policy and regulatory measures that shift financial incentives to align with the rapid adoption of low-carbon technologies, products and services by businesses and consumers. 
• Coordinated investor pressure will be necessary to drive global convergence of the data and metrics developed by third party data providers to achieve the comparability and consistency necessary to support investors’ net zero programs,
• Conventional financial measures and GHG emissions accounting will need to become integrated within a ‘dual measurement’ system. The concept of ‘net zero emissions’ has an unprecedented, science-based global carbon budget which is cumulative and cannot be exceeded. This type of individual and aggregate constraint on business investments and activities is a new and difficult to understand concept for the many actors within the traditional financial system.
• Investors have a longstanding obligation to meet their fiduciary duties in generating financial returns for their beneficiaries and clients. However, as the economy is further impacted by climate change, the fiduciary duties of investors will evolve. As it becomes increasingly clear that climate change could have a significant impact on financial returns over a range of investment horizons, investors are continuing to assess how their net zero commitments interact with and align to these fiduciary duties.
• To enable the net zero transition and increase the size of the investable universe, new value chains may need to be created and financed to rapidly scale the development and deployment of the low emission technologies, products and services needed to achieve decarbonization targets. 
• The increased prevalence and severity of droughts, flooding, wildfires, and heat waves has highlighted the need for increased investments in climate resilience and adaptation. Investors will need to further incorporate climate adaptation and resilience factors when assessing and managing physicals risks as part of their ongoing investment processes, including investments in sustainable infrastructure

I will leave it up to my readers to read the entire Playbook as it is very detailed and full of pertinent information for investors looking to enhance and advance their transition to net zero.

Below, I embed the case studies featuring some of Canada's largest pension investment managers:

OMERS:

OTPP:

 

PSP Investments:

CDPQ:

CPP Investments:

Now, after reading this Playbook, you will see that significant work has been done by all the ILN members to provide practical insights on transition investing and highlight key challenges that still remain.

Responsible investing is integral to all of Canada's large pension investment managers and while the approaches may differ, there is a clear commitment to achieve their net zero targets as soon as possible.

They are also doing their part to share important information with other institutional investors and stakeholders along the way. 

Lastly, the transition to net zero is complex and requires a lot of collaboration from all stakeholders. I agree with the Playbook, institutional investors and other financial services organizations will play an integral part in this transition by reducing their portfolios’ reported financed emissions but also by strategically incorporating the financing of real economy emissions reductions within their net zero approaches.

Below, Amy Hepburn, Chief Executive Officer at the Investor Leadership Network, discusses the importance of investors and public-private collaboration in driving the green transition.

Also, a report on the net-zero transition from McKinsey found that there is an estimated $6-9T in total annual capital required across all energy and land systems, to achieve net zero emissions by 2050. 

In this video, report co-authors Dickon Pinner and Mekala Krishnan answer questions about the net-zero transition including:  Why is the net-zero transition so important—and what is the challenge?; What will change take? and Does the path to net zero look promising?