Investing in renewable energy firms through royalty framework
A coalition of pension funds and insurance companies that includes Allianz SE, the California Public Employees’ Retirement System and Zurich Insurance Group AG have committed to managing US$7.1 trillion of assets in line with the Paris Agreement’s goal of limiting warming to 1.5 degrees Celsius.
The United Nations-convened Net Zero Asset Owner Alliance said in a statement Tuesday that 44 of its 74 members are setting 2025 targets that support the Paris climate objective, up from 29 firms last year. Alliance members, which also include Aviva Plc, Axa SA and Swiss Re AG, together oversee US$10.6 trillion of assets. They must adopt five-year targets within 12 months of joining and are expected to achieve net-zero emissions by 2050 across their entire portfolios.
As providers of capital and loss protection, investors and insurers can use their financial firepower to drive the transition to a greener global economy. They can do so by divesting from high-carbon companies, boosting their stakes in clean-energy businesses and pushing existing portfolio companies to meaningfully reduce their carbon footprints. The speed and scale of those decisions will be vital. Scientists say that global greenhouse-gas emissions need to halve by 2030 to avoid catastrophic impacts of climate change.
This year’s progress is noteworthy because of the war in Ukraine and a global energy crisis, Gunther Thallinger, chair of the alliance, said in an interview.
“In today's world, where there's a lot of tension in terms of energy markets and the possibility to do something at all, here is a group of investors who have set targets and who performed against these targets,” Thallinger said. “They simply do emissions reduction by changing their portfolio companies.”
In another sign of progress, members’ investments in so-called climate solutions such as clean technologies or green infrastructure rose almost threefold to US$253 billion this year from US$87 billion in 2021, the alliance said.
The group is trying to make its target-setting approach more robust. In January, it said it would require members to slash between 49 per cent and 65 per cent off their carbon footprint by the end of the decade, including Scope 3, or financed, emissions. Scope 3 emissions emanate from a company’s broader value chain. They typically make up 95 per cent to 97 per cent of an investor’s emissions and can be especially hard to curb.
Getting behind the 1.5°C ambition is both a climate imperative and smart business, the asset owners said in a report. “The very future of the financial system depends precisely on it taking responsibility for emissions facilitated through investment, underwriting, and lending,” the group said.