PAAO initiative’s first progress report showcases innovation, best practice for net zero goals

The Paris Aligned Asset Owners (PAAO) initiative, an international group of asset owners committed to supporting the goal of net zero greenhouse gas emission by 2050 or sooner, has published its first Progress Report showcasing innovation and best practice amongst asset owners for turning net zero commitments into action.

Alongside the Progress Report, initial target disclosures have also been published for a further 13 asset owners taking the total to 40 since the initiative launched in March 2021.

The latest disclosures include targets from asset owners including AP7, Lloyds Banking Group Pensions Trustees Limited, Railpen and Ilmarinen.

Asset owners are typically pension and superannuation funds, and increasingly occupy a systemically crucial position in the process of aligning financial flows to net zero by 2050.

PAAO is an outcome of the Paris Aligned Investment Initiative (PAII), which was established as a collaborative investor-led forum to support investors to align their portfolios and investment activities to the goals of the Paris Agreement.

Since 2021, PAAO has been a partner to the UN Climate Champion’s Race to Zero campaign and a member of the Glasgow Finance Alliance for Net Zero (GFANZ).

PAAO signatories draw on the Net Zero Investment Framework, the most widely utilised net zero methodology by financial institutions, to set targets and devise a net zero investment strategy.

PAAO’s 10-point commitment

The Progress Report, which includes 29 case studies, shows how asset owners are developing a range of strategies and approaches to fulfil the criteria set by the PAAO 10-point commitment. Highlights include:

• Investment in climate solutions (commitment 3): 98% of PAAO signatories that have disclosed targets have established either a quantitative target or qualitative goal for increasing investments in climate solutions. Despite the absence of an industry standard that can be applied across an investment portfolio, signatories have measured their current allocation and set ambitious quantitative targets ranging from 6% of AUM to 25% of AUM by 2030.
• Stewardship and engagement (commitment 6): Many asset owners have started to clearly communicate expectations for transitioning to the companies they invest in, including setting timebound milestones. Where specific objectives are not met, escalation is starting to become the norm, as recently shown by the decision to file a case against Volkswagen AG by several PAAO signatories after it refused repeated attempts to reveal crucial information on its corporate climate lobbying activities.
• Fossil fuels investment policies: 23 signatories that have made disclosures have fossil fuel investment policies in place or under development. The policies vary but often include exclusions of companies that derive a certain proportion of sales or revenues from carbon-intensive activities such as those relating to coal mining, or fossil fuel extraction from tar sands or oil and gas. For example, Dutch pension fund PFZW has set clear time-bound expectations of fossil fuel companies, including a deadline of 2024 for divesting where key criteria is not met.

Debby Blakey, chief executive officer of HESTA, one of the signatories, said: “As the super fund representing those working in Australia’s health and community services sector, the risks and opportunities related to climate change have been a key focus area for HESTA for many years. This initiative provides a rigorous methodology to underpin our targets which provides better transparency and aligns us with international standards. This will improve our own climate-aligned investment practice, and will contribute to collective, accelerated climate action within the broader financial sector.”

Charlotta Dawidowski Sydstrand, head of ESG at AP7, another signatory, said: “Achieving real economy emissions reductions, which is at the core of the Paris Aligned Asset Owner commitment, is more urgent than ever given the deepening climate crisis. Among the variety of net zero strategies showcased in the progress report, AP7 provides its perspective on targets and escalation tactics as a universal active owner.”

Adam Matthews, PAII steering group co-chair and chief responsible investment officer at the Church of England Pensions Board, added: “The Paris Aligned Asset Owners initiative has been an enormously important, practical and collaborative forum for developing best practice for investors committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner. As an asset owner, we will always act in the best interests of our beneficiaries and take decisions independently – however, it has been extremely valuable to see the different approaches taken by other investors, to be able to share what works and to learn as we individually work to achieve our net zero goals.”

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