Scientific Beta

In this note, we discuss the philosophy and practical recommendations of the foremost institutional-investor led net-zero investment frameworks, i.e., the Paris-aligned Investment Initiative Net-Zero Investment Framework Implementation Guide (v1.0) and the UN-convened Net-Zero Asset Owner Alliance Target Setting Protocol (v2.0).

After providing some background on the investor coalitions involved, we underline that both frameworks share a concern for aligning investment management towards net-zero in a manner that contributes to the transition. We present the three channels that investors may use to try and alter activity in the real economy and explain the importance given to each of these channels by the frameworks. We then give a high-level description of the components of each framework before discussing how top-level portfolio targets are to be defined in relation to IPCC scenarios and how the frameworks require the setting of investment management targets in relation to investor impact channels to promote real-world outcomes. Finally, we look at the frameworks’ recommendations for equity investment management, reviewing requirements and recommendations in relation to portfolio construction approaches and engagement activities and the roles they may play for portfolio alignment and the promotion of investor impact.