The Net Zero Asset Owner Alliance (NZAOA) has sharpened its focus on target-setting for transition finance and climate solutions in its latest review.
The UN-backed body released the fifth version of its framework, known as TSP5, this week.
The update sees the addition of a new “transition target” category, designed to encourage its members to allocate capital to high-emitting companies with “credible” plans to get to net zero.
NZAOA has introduced five principles to help identify good transition plans, based on “other credible frameworks” that already exist.
It said “transition finance primarily refers to investing and financing companies that are taking credible steps to align with net-zero targets in the high-emitting sectors”.
Related targets should cover “at least 80%” of total in-scope portfolio emissions, across the highest emitting sectors, it continued.
They should also “at least cover the listed equities and public corporate debt under their transition target, with the optionality to incorporate additional asset classes progressively”.
A spokesperson for NZAOA said the updated TSP5 “also includes a quantitative investment target for climate solutions, focusing on funding green transition technologies”.
“This makes the climate solutions requirement more concrete and measurable compared to TSP4,” he explained.
NZAOA defines climate solutions as economic activities that “contribute to climate change mitigation (including transition enabling) and/or adaptation, in alignment with existing climate related‑sustainability taxonomies and other generally acknowledged climate‑related frameworks”.
It namechecks high-voltage direct current transmission lines, smart grids and electric battery plants as prime examples, along with building defences to protect against sea-level rise and planting heat-resistant crops.
The update means TSP5 now includes transition and climate-solution targets alongside similar categories for sectors, engagement, and sub-portfolio emissions.
NZAOA requires signatories to set targets for engagement – with portfolio companies, asset managers and other stakeholders – alongside at least two other categories of their choice.
“TSP5 reinforces incentives for asset-manager engagement and updated KPIs to enhance target-setting and stewardship practices,” said the spokesperson.
It also introduces the option for asset owners to get a third-party review on their NZAOA output, in a bid to enhance interoperability with regulatory requirements, “reducing, where possible, redundant reporting for members”.
The new expectations will be phased in over time, to provide “a flexible and structured way to gradually align investment portfolios with climate transition goals, while accounting for differences in investment universe, regional contexts and market maturity”.
Asset owners are expected to set targets either in absolute terms, or as a percentage of their total assets under management.
