When the $11trn Net Zero Asset Owner Alliance (NZAOA) updated its target-setting protocol earlier this year, it did not anticipate the reaction it got.

The UN-convened group, whose 84 members include some of the world’s biggest pension funds and insurance companies, published the annual revision to its guidance in January, outlining how asset owners should set (and measure performance against) net-zero goals.

The headlines that followed reported that NZAOA had “banned” carbon offsets, and it triggered an unusual reaction from those in the offsetting industry – an open letter.

Signed by a handful of well-known commercial organisations, such as Nasdaq’s carbon removal platform Puro.earth and offsetting specialist South Pole, the letter was also backed by Oxford professor Myles Allen – an architect of the widely-used Principles for Net Zero Aligned Carbon Offsetting. This last signatory is particularly embarrassing for NZAOA, as its protocol cites those principles as a benchmark.

The open letter agreed that NZAOA should focus on abatement, but said that “in its current form [the protocol] risks stifling investment in carbon removals” by limiting how members can account for that investment when calculating their contribution to climate objectives.

Jesica Andrews, investment lead at NZAOA, was surprised by the reaction to the updated guidelines, chiefly because they don’t say anything new in relation to the use of removals and offsets.

“This isn’t a new approach,” she tells IPE, noting that the thinking was developed in a 2021 paper by the Alliance titled Net in Net Zero. “What’s new is simply that we codified it in our main document.”

What’s been codified is the proscription of offsets, between now and 2030 at least, as a means of reaching portfolio or sector-level climate goals. In other words, investors can’t count offsets they’ve purchased – or investments into the technologies that underpin those offsets – towards their decarbonisation efforts.

“All we’re saying is that, until the end of the decade, asset owners have to achieve their decarbonisation targets by ensuring companies are abating their emissions,” explains Andrews. “This is a really important decade for dealing with climate change, so asset owners have to decarbonise the real economy.”

The thinking is that there are currently plenty of opportunities for genuine emissions reductions within businesses (through more efficient operations, technological innovations, retiring polluting assets, etc), so that’s where the focus needs to be.

But it is widely accepted that, even once all reasonable mitigation efforts have been made, there will still be ‘residual emissions’ that can’t be decarbonised, especially in hard-to-abate sectors like cement and steel. And that’s when investors and companies can start counting investments into carbon removal towards their decarbonisation targets.

“For some sectors, offsets will never be appropriate, because there will always be more direct ways to achieve decarbonisation”

Jesica Andrews, investment lead at NZAOA

“Offsets and removals should only come into play [for target achievement purposes] where businesses genuinely cannot get out of carbon,” says Andrews. “So first we need to get to the stage where we’ve achieved what we can in terms of abatement for each sector. And for some sectors, offsets will never be appropriate, because there will always be more direct ways to achieve decarbonisation.”

But the carbon removals industry is nervous that, by ruling out the use of offsets for the next few years, NZAOA is discouraging investment into activities that will be vital for the next phase of achieving net zero.

Speaking at the time the open letter was published, Ben Rubin, the executive director of the Carbon Business Council, said: “Investments [into carbon removals] are required today to ensure that there is a robust menu of options for net zero and net negative portfolios as we look toward 2030 and beyond.”

The letter’s authors therefore urge the Alliance to explicitly encourage its members to invest in removals technologies before 2030, and introduce a dedicated target into the protocol.

But NZAOA argues that it already encourages this. The protocol states that “members are highly encouraged to contribute to a liquid and well-regulated carbon removal certificate market before 2030 as such a market is important for accelerating decarbonisation”, and “to invest in projects and technologies of durable CO₂ avoidance and removal to scale future markets rapidly”.

Those investments are not eligible under members’ decarbonisation targets, but they count towards separate ‘financing transition’ targets, also required under the protocol. That category covers all kinds of investments, though, and NZAOA says it has no plans to carve out a dedicated target for carbon removals and offsetting markets.

The signatories to the open letter did not respond to multiple interview requests for this article.

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