Investing in companies that are aligned to net zero

We said...

We aim to ensure that by 2025 at least 32% (by value) of our listed equities investments in material sectors meet the criteria to be considered aligning to net zero (as a minimum) as defined by the Net Zero Investment Framework (NZIF). We aim for this proportion to rise to 55% by 2030. By 2040, we aim for 100% of our listed equities investments in material sectors meet the criteria to be considered ‘aligned’ to net zero (as a minimum) as defined by the NZIF.

At 31 December 2021, we understood our listed equity portfolio to include 44 companies operating in material sectors*. These 44 companies represented around 9% of our listed equity assets by value. Of our investments in material sector companies, 14% by value were assessed as aligning to net zero, and none were yet assessed as being aligned to net zero. The target of achieving 32% aligning by 2025 is based on a straight-line increase to 100% aligned by 2040 which is the standard specified by the NZIF. 

In practice, we know that actual progress is unlikely to follow this straight line – there will be periods of faster and slower progress. The interim goals for 2025 and 2030 represent approximate milestones in our journey towards full alignment. We intend to reach these goals by engaging with companies to ensure that they align to net zero (see our engagement goal). We believe that successful engagement leads to better outcomes than divestment, and in most cases is more likely to result in real-world emissions reductions. However, we will support selective divestment from companies that do not respond sufficiently to engagement.

Where are we now? 

Since we published our first report, the methodology and data for this goal have improved, meaning that more companies we invest in are now classed as being in material sectors than we first thought. The criteria used to identify a company as aligning vs aligned has also been tightened. 

We now assess that we have 270 companies in material sectors which is much more than our original 44. 

At June 2023, the proportion of our assets under management (AUM) in material sectors which were aligned to net zero was 24.3% with another 5.2% identified as aligning. This means that overall, 29.5% of our AUM in material sectors is assessed as aligned or aligning to net zero. 

While no companies as yet are net zero**, we are very close to our first interim target level (32% by 2025). 

Bear in mind that the number of companies has increased so our performance here is better, more widespread and more meaningful than we had initially envisaged it would need to be.

* Following an updated understanding of material and high impact sectors definitions, 44 has been revised upwards to 280 companies in material sectors at that time.

** Accurately assessing if a company is on a 1.5 aligned pathway has been difficult to date due to a lack of credible data and tools. However, the market has developed substantially; tools are under development which will make our assessment more accurate in the future.

Asset class goals (for context only)

The asset class goals consider each asset class separately. The goals are tailored to the specifics of each asset class and will grow as new asset classes are added. For our two asset class goals, we assess the extent to which each company in our portfolio is aligned to net zero. We use the Net Zero Investment Framework (NZIF) which helps us to categorise companies by setting the criteria. These criteria set a high standard for companies to be considered net zero or aligned to a net-zero pathway, reflecting the fact that significant change is needed in the real world to achieve the Paris Agreement. As a result, a relatively low proportion of companies are currently considered to be aligned to a net-zero pathway.

The purpose of the alignment goals is to increase the number of companies that are making the real-world changes required to align to net zero.