Frequently Asked Questions

For all financial institutions, acting responsibly on climate change means tracking, evaluating, and decreasing their financed emissions (also called Scope 3 emissions). For asset owners specifically, the net-zero transition takes the form of a managed reduction of portfolio emissions in accordance with the Paris Agreement (Art. 2.1c). To accomplish this, the Alliance believes asset owners have three main points of leverage: capital allocation strategies, engagement approaches, and field building.

• Defining targets based on capital allocation pushes members to support the transition by laying out plans to invest in climate-ambitious companies and climate solution projects. While capital (re)allocation does not in and of itself directly lead to emission reduction in the real economy, it does provide an important signaling effect to both businesses and policymakers that capital will be made available for new, promising, low-carbon business models.
• Engagement is one of the most direct mechanisms by which investors can represent their interests and concerns to companies, issuers, policy makers or regulators, and is thus one of the most direct pathways to influencing real-economy outcomes. The Alliance’s engagement mission is for members’ investee companies and asset managers to understand and represent the members’ long-term interests of achieving an orderly transition to a net-zero economy. The Alliance discusses some of the strengths and weaknesses of each form of engagement (corporate, sectoral, asset manager, and policy) in the paper The Future of Investor Engagement (2022).
• Field building refers to changing the norms and standards in the ecosystem that asset owners—together with with asset managers, investee companies, regulators, and policy makers—are embedded in (MacLeod & Park, 2011; Marti et al., 2023). Given that the effectiveness of field building grows as the existing approaches converge over time, the Alliance will continue to work and share expertise with other initiatives and stakeholders.

The Alliance requires reporting of both absolute- and intensity-based KPIs since both metrics can be useful to investors. Aggregate absolute emission reporting was also included in the Alliance’s Third Progress Report, published in September 2023.

However, sub-portfolio (or asset class) target-setting can be expressed in either absolute or intensity reductions. A measurement of decarbonisation on the marginal dollar is more tailored to those asset owners that may be expecting significant growth in their portfolios or that are looking to engage with hard-to-abate sectors. Using a carbon–intensity measure can also allow investors to compare companies within an industry and chose the best-in-class investees, based on carbon efficiency.  

The Principles for Responsible Investment’s (PRI) report Fiduciary Duty in the 21st Century has demonstrated that ESG issues are financially material for investors. The subsequent Legal Framework for Impact project explored where investors are permitted, as well as obligated, to take such considerations into account in their fiduciary duties across 11 jurisdictions. This is why Alliance members are expected to, first, showcase a change in their own investment activity and set intermediate decarbonisation targets at portfolio level 12 months after joining.  However, for investors to avoid a shrinking investable universe, they must play an active role in transforming the high-emitting firms and sectors, as this is central to reducing GHG emissions in the real economy.

The latest findings of the Intergovernmental Panel on Climate Change (IPCC) unequivocally show that “climate change is a threat to human wellbeing” by posing risks to “people’s health, lives and livelihoods, as well as property and critical infrastructure”. Therefore, a net-zero economy transition is expected to have positive societal impacts. Nevertheless, if inappropriately designed, certain climate policies could have regressive societal impacts. Therefore, policy development and implementation should be based on the principle of minimising any negative impacts on marginalised populations. The principle of “just transition” has been integrated into the Alliance’s Target Setting Protocol through its third edition (please see pages 11 – 13 for more information).   

The Alliance advises a managed phase-out of fossil fuels in line with science-based scenarios, particularly the International Energy Agency (IEA)’s NZE2050 pathway and the One Earth Climate Model’s sector pathways. This view is embedded in the Alliance’s Position on the Oil and Gas Sector. The position defines expectations for three key stakeholder groups: companies, policymakers, and investors. The expectations have been conceptualised so as to respond to the scientific imperative to decarbonise rapidly while supporting a balance between the industrial supply of fossil fuels and society’s demand for affordable and reliable energy. 

For Alliance members, positions prescribe binding approaches of the Alliance. Where such approaches set expectations for investors, which is the case for the Position on the Oil and Gas Sector, members are required to adopt individual positions aligned with those of the Alliance or provide an explanation.

Members’ individual positions will be expected to use both asset allocation and investment stewardship. Regarding asset allocation, members should explicitly and strategically consider their portfolio allocation decisions as they relate to systemic risks of climate change. Specific attention is paid to direct infrastructure investments, where members are required to cease project investment in any new oil and gas fields. As for recommended stewardship activities, the Alliance expects members to engage with oil and gas corporates on science-based targets, benchmarking, and lobbying alignment directly and through asset managers.  

As per The Alliance’s Net in Net Zero Position (2021), the purchase of carbon credits by asset owners or investee companies shall not count towards decarbonisation target achievement until at least 2030 (except for qualified removals purchased by investee companies). However, the Alliance encourages members to invest in high quality, long-lived removals and into climate solution technologies to scale future markets rapidly. These investments count towards achievement of a member’s Financing Transition Target. 

 Moreover, the Alliance devotes two work tracks to ensuring investment is flowing to where it is most needed – climate solutions in emerging markets and developing economies (EMDEs). The Alliance has published a Call to Action to Policy Makers for Scaling Blended Finance and a CTA to Asset Managers. Still, investment into climate solutions cannot constitute the sole transition activity, as the Alliance Commitment focuses on portfolio-wide and cross-sector decarbonisation.  

Divestment can send a strong signal to industry and policymakers when coupled with strong public discourse and messaging, it can also increase the cost of or diminish access to capital if undertaken by a critical mass of investors. However, on the whole, it has little effect on real world decarbonisation. Thus, the Alliance does not consider divestment a separate approach to engendering the transition, but an adjustment of an individual investment filter. Meaning, investors will exclude those companies whose underlying business models do not contribute to safeguarding the desired portfolio performance. The Alliance also advises that divestment is used as part of an escalation strategy—a “last resort” when requested changes discussed during engagement have not materialised. The focus on the “last resort” is important because divestment takes away investors’ voting rights and therefore their influence to support low-carbon strategies at investee companies.

The Alliance believes that physical and financial risks inherent to unabated climate change and abrupt policy changes pose the most disruptive threat in the coming decades. Therefore, portfolio decarbonisation (through engendering the net-zero transition of investee companies) is the best risk-mitigation strategy that asset owners can put in place. 

According to the IPCC’s Special Report on 1.5°C (SR15), limiting global warming to 1.5°C requires reaching net-zero CO2 emissions by 2050 and drastically cutting all other non-CO2 GHG emissions. The Alliance will track all GHGs; require CO2-equivalent reporting; and encourage reporting of all other non-CO2 GHGs. The mandatory inclusion of the latter will be considered in the future based on data availability. 

Members are required to set intermediate targets to ensure consistent and progressive decarbonisation by 2050. Asset owners set targets for delivery by 2025, 2030, and 2040— in line with Article 4.9 of the Paris Agreement. The Alliance created its framework for target–setting and reporting through its Target Setting Protocol (TSP), which is updated annually based on new science and methodologies.  

The Commitment covers all asset classes and all proprietary portfolios, both internally and externally managed. However, intermediate target-setting focuses on those asset classes where reliable methodologies for carbon accounting and reporting exist.  

The release of the Protocol’s third edition made it mandatory for Alliance members to set targets on listed equity, publicly traded corporate bonds, real estate (equity and commercial debt), infrastructure (equity and debt), and private equity portfolios. The timeline for inclusion of additional asset classes into the Protocol is outlined on pages 39-40.

Target-setting in the Alliance is based on four pillars: sub-portfolio, sector, engagement, and financing transition (see TSP2 page 30). All members are required to define their ambition on at least three out of the four target types. Members must publish their targets 12 months after joining and must report on progress annually to the Alliance Secretariat.  

To ensure members meet minimum criteria with respect to target-setting, the Alliance developed its Accountability Mechanism which is based on anonymised peer review, a traffic light system, and a time-bound expectation of compliance. The Mechanism also outlines the process for delisting an institution in case of severe misalignment with the TSP.  

Given that the reporting cycle takes place at a set time (between March and May) every year, members may have to publish their targets before reporting them to the Secretariat. For a detailed timetable on target-setting (based on the member’s year of joining), see page 17 of TSP3. 

The Alliance develops positions to lead on climate action and policymaker engagement in the financial industry. For relevant Alliance positions, members are required to adopt and publish corresponding individual policies or approaches. Members also commit to support the Alliance through their participation in the working tracks and through membership fees.

The Alliance is UN-convened as its Secretariat is co-staffed by the United Nations Environment Programme Finance Initiative and the Principles for Responsible Investment. Both organisations have a mandate to engage with financial institutions on science-based climate change action. The UNEP FI Head and the PRI CEO both sit on the Alliance’s highest decision-making body, the Alliance Steering Group.  

The Alliance was launched at the UN Secretary General’s Climate Action Summit in September 2019 along with the Race to Zero Campaign (RtZ), known as the Climate Ambition Alliance at the time. The Alliance is therefore an original partner of RtZ. 

In addition to the Alliance, various other finance-sector alliances have been formed since 2019 to unify banks, insurers, asset managers and service providers. To connect these various financial alliances, the Glasgow Financial Alliance for Net Zero (GFANZ) was launched as a pan-sector coalition in April 2021 by the COP26 Presidency and the UN Special Envoy for Climate Action and Finance—Mark Carney. 

The Alliance’s ambition is to remain part of these wider partnerships, while maintaining autonomy over its governance processes.  

Global Optimism (convened by former UNFCCC Executive Secretary, Christiana Figueres) and WWF offer strategic advice to the Alliance’s Steering Group. The Alliance’s Commitment allows for additional strategic advisors to come onboard through a majority vote in the Steering Group.  

 For Alliance’s Guidelines and Positions – the documents which require members’ implementation and reporting – the Alliance consults Strategic Advisors and may open public consultations, like in the case of the Target Setting Protocols.