As governments worldwide increasingly commit to net-zero greenhouse gas emissions targets, companies and investors recognize the need to manage the risk of misalignment with those commitments.
Corporate commitments and emissions-reduction plans are not always science-based or realistic, however, and the data available for assessing alignment is often incomplete and backward-looking. That makes it tempting to rely on one of the many new “Paris-Aligned” or “Climate Transition” indices as a reference point, but we argue that the European Union regulation defining the parameters of these benchmarks is flawed, forcing them to achieve emissions reduction with the blunt instrument of reducing the weight of high-emitting sectors.
That is why we believe investors must make their own assessment of companies’ net-zero alignment, and why we think those assessments should be informed by fundamental-research capabilities that can fill the gaps in the data with specialist, real-time insight. Neuberger Berman’s Net-Zero Alignment Indicator is designed to answer this need.
In this paper, we describe how the Indicator works, and why we think it is necessary for any investor wanting to assess companies’ progress on emissions reduction, and identify where they might help to drive that progress.
- In our view, the degree to which investment portfolios are aligned with the broadly adopted policy target of net-zero emissions by 2050 represents an important source of risk and opportunity.
- A number of “Paris-Aligned” or “Climate Transition” index benchmarks have appeared on the market, but they suffer from flaws due to incomplete data and poorly conceived parameters in the benchmark regulation.
- We believe investors must make their own assessment of companies’ net-zero alignment, and that these assessments should be informed by fundamental-research that complement reported data.
- The Net-Zero Investment Framework (NZIF) developed by the Institutional Investor Group on Climate Change (IIGCC) provides a useful model, particularly in terms of its forward-looking emphasis and its recognition of sector differentiation.
- The NB Net Zero Alignment Indicator builds on the IIGCC NZIF.
- Quantitative scores draw on multiple third-party data points
- Qualitative inputs from specialist research analysts can override the initial quantitative scores
- Real-world examples of analysts overriding initial quantitative scores demonstrate the critical importance of this analyst input in the process.
- Where an investor has a substantial company engagement program, the NB Net Zero Alignment Indicator introduces an additional feedback loop insights from engagement feed into the scores, and those evolving scores then help us to track and focus engagement on issuers’ specific areas of weakness.