Net Zero Investment Framework (NZI)

Who is in scope?

The Framework is intended to be adopted and implemented by investors following a PAII Net Zero Asset Owner Commitment or a Net Zero Asset Managers initiative commitment. Four different asset classes – sovereign bonds, listed equities, corporate fixed income and real estate – are covered by the framework.

The PAII has released an annex to NZI 1.0, now covering private equity, which was published for public consultation in February 2022.

How do investors have to consider sustainability in general?

The Net Zero Investment Framework proposes key components of a net-zero investment strategy. Such a strategy should focus on achieving two alignment objectives:

• To decarbonise investment portfolios in a way that is consistent with achieving global net-zero greenhouse gas emissions by 2050; and,

• To increase investment in the range of ‘climate solutions’ needed to meet that goal.

The NZI Framework consists of six components adjusted to the investment process.

1. Governance and Strategy, among others:

   1. Commit to the goal of achieving net zero portfolio emissions by 2050, or sooner, and adopt an investment strategy consistent with the achievement of global net zero emissions by this date

   2. Define beliefs, set investment strategy and mandates/performance objectives for portfolio managers, asset managers, and other relevant personnel

2. Targets and Objectives

   1. Set medium-term emissions reduction and climate solutions reference targets to inform strategic asset allocation and monitor impact of strategy

3. Strategic Asset Allocation, among others:

   1. Update capital market assumptions based on scenario analysis

   2. Optimisation with emissions and climate solutions metrics

   3. Set asset class mix with climate variants

4. Asset Class Alignment, among others:

   1. Assess assets based on current and forward-looking alignment criteria, and investment in climate solutions

   2. Set goals for increasing % AUM invested in aligned assets

   3. Implement portfolio construction: Screening, positive and negative weighting, tilted benchmarks to allocate capital to support alignment and invest in climate solutions

5. Policy Advocacy

   1. Collective and direct advocacy delivered through meetings, letters, responding to consultations, and media activity, as well as ensuring trade association advocacy is consistent with net zero goals

6. Market Engagement

   1. Market actors including credit rating agencies, auditors, stock exchanges, proxy advisers, investment consultants, and data and service providers

On which sustainability topics do investors have to report?

The Framework does not seek to create its own reporting standard, however investors using the Framework are encouraged to disclose their targets, and report annually on progress towards these targets and actions to implement net zero.

Does the framework define specific sustainability indicators?

In terms of disclosure, the networks already advocate that asset owners and asset managers should disclose annually in line with the recommendations of the TCFD with respect to climate-related financial risk.

To ensure transparency and robust implementation of net-zero commitments the networks also recommend disclosing the following information related to implementation of the Framework, which can be done in line with the TCFD reporting structure as follows.

Governance

• The board/CEO level commitment to the goal of achieving net zero portfolio emissions by 2050 or sooner, as relevant for asset owners or asset managers, and responsibility for implementation of the commitment and strategy.

• How climate objectives have been incorporated into mandates and objectives for asset managers, portfolio managers, and other personnel as relevant.

Strategy

• The key principles and components of the investor’s strategy for achieving the commitments to net zero and implementing this Framework, and how the strategy and targets represent an investor’s maximum possible effort to reducing emissions and increasing allocation to climate solutions.

• If relevant, how climate metrics, targets and objectives have been incorporated into SAA or similar processes.

• Constraints identified to achieving greater alignment and how these have been addressed, as appropriate.

• The key principles and components of a net zero engagement and stewardship strategy, including escalation and milestones.

Metrics and Targets

• The targets set including how these targets were calculated, and evidence and information that was used to inform the target setting process.

• The science-based scenario(s) or pathway(s) used to guide target setting and assess the alignment of companies, including the name of the relevant model(s), how these meet the relevant parameters, and critical assumptions used.

• Methodologies used to assess alignment of assets, and the extent to which these are consistent with the key features of the recommended methodologies.

• Performance against targets over time, and any updates or adjustments to targets that are relevant.

Management

• Portfolio construction approaches implemented and/or products developed to facilitate allocation to products that support net zero aligned investing.

• Engagement, stewardship and direct management actions undertaken, performance in relation to the engagement threshold, and key outcomes achieved.

• Voting policy and voting record, including an explanation of any deviations from the policy.

• Policy in relation to exclusions or phase out of fossil fuel investments.

• Where divestment or exclusion has been used, the rationale, and the extent to which this has been the means to achieve targets.

• Information on direct and collective policy actions undertaken across the key areas for advocacy, including outcomes achieved.

• Information on market engagement actions undertaken, including outcomes achieved.