Defining a ‘net zero aligned’ investment portfolio is no straightforward task. To guide our implementation, we are looking to the Net Zero Investment Framework, developed by the Paris Aligned Investment Initiative, with input from BMO GAM. This is a comprehensive framework, covering governance, target-setting, methodologies for specific asset classes, and policy and stakeholder engagement.
BMO GAM is currently co-chairing the Implementation Working Group, aimed at sharing experiences between asset owners and managers working with the Framework, and producing further guidance on its application.
The Framework sets out detailed guidance on:
• Portfolio-level targets for emissions reductions, consistent with a fair share of a 50% cut in global emissions by 2030, and net zero by 2050
• Analysis of underlying assets (companies, countries or other assets) on a forward-looking basis, to understand whether these are on a trajectory consistent with the net zero transition
• Investment in solutions – recognising that as we decarbonise the emissions-intensive economy, we need a huge scaling up in finance for green activities
An important evolution embedded in this approach is the shift in emphasis from a historical, backward-looking metric – portfolio carbon emissions – towards a greater focus on analysis of the likely future trajectory of these emissions.
To take listed debt or equity issuers as an example, we will aim to assess the extent to which companies in our portfolios are aligned to a 1.5°C future. In doing so, we will seek to understand how these companies compare with decarbonisation pathways for their own sector, rather than take the same approach for all – recognising that decarbonisation challenges, and the availability of technological solutions, vary significantly by industry. We also believe it is important to look not just the ambition of company targets, but also the credibility of plans to implement these – taking into account factors such as their governance approach, whether there are shorter-term interim targets in place, and whether capital expenditure plans are tilting towards a greener approach.
Such analysis is complex, and the data challenges are considerable. But the work of organisations such as the Transition Pathway Initiative, the Science-based Targets Initiative, and the Climate Action 100+ initiative in its recent benchmark report are all examples of this more nuanced approach.
BMO Financial Group is also focusing on enhancing the availability of high-quality data on climate risks and opportunities, through the creation of the BMO Climate Institute, which will partner with industry, governments, academia and investors.