Listening to investors has made the Net Zero Investment Framework more responsive to market dynamics
The Net Zero Investment Framework (NZIF) has become the world’s go-to resource for investors committed to reducing greenhouse gas emissions and managing the financial risks and opportunities posed by climate change. In its latest iteration, NZIF 2.0 offers crucial updates to make it more effective, reflecting how global investors are evolving their strategies to prepare for the inevitable low-carbon economy.
Subtle but important changes have already begun to make a transformative impact. Switching just three words by calling for “financing reduced emissions” rather than “reducing financed emissions,” for example, addressed investor feedback that the original wording could result in “perverse outcomes” such as discouraging investment in some climate solutions.
The developers aimed to address this feedback in the NZIF 2.0, ensuring that the framework included and promoted climate solutions investments. The updated 2.0 framework also offers greater transparency and accountability, and guidance for additional asset classes, including sovereign bonds, real estate, private debt, infrastructure and equity.
These changes make the tool more relevant for investor action. Why? Investment managers increasingly recognize that climate risks are material financial risks. And as the systemic, far-reaching impacts of climate change are becoming more pronounced and tangible, it’s clear that climate-related financial risks cannot be addressed through analysis of or investment in one company — or one even sector — at a time. The potential impact of climate risks and solutions can be fully understood only in the context of each sector and its place in the economy as a whole.
The potential impact of climate risks and solutions can be fully understood only in the context of each sector and its place in the economy as a whole.
Including the real impact of climate change on returns
NZIF 2.0 helps investment managers address these broader risks and opportunities by emphasizing the need to prepare portfolios for the real impacts of climate change. It also encourages identifying value-creating opportunities in the emerging net zero emissions economy to maximize long-term returns.
With major implications for the broader economy, the insurance sector has, for example, been suffering profit losses and shifting its coverage strategies to reduce the risks of extreme weather events and physical damage. Heavy users of energy, such as data centers or manufacturing facilities, face the risk that energy prices will be volatile or that consistent power will be unavailable in some geographic areas. Those risks, and the opportunities they create, are impacting investment in these sectors.
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If an investor simply divests from a high-carbon asset to decarbonize their portfolio, that risk doesn’t disappear. It will, however, likely be picked up by another investor, and the broader economic threat persists. NZIF 2.0 addresses that problem by recommending that investors focus on actions that will actually reduce real economy emissions, rather than just avoiding investments that would substantially add emissions.
“A portfolio decarbonized through actions that do not reduce real economy emissions is likely to still be exposed to systemic financial risks,” the updated framework says.
Low-carbon energy transition investments hit a record $1.77tn in annual investment
At the same time, accelerated policy and regulatory actions around the world present real opportunities for investors as new clean energy and climate solutions technologies scale to advance the low-carbon economy. For example, in the U.S., the Inflation Reduction Act provides more than $369 billion in investment and tax incentives to build clean energy and manufacturing, and has created more than 334,000 new jobs.
Global flows to low-carbon energy transition investments grew 17% in 2023, hitting a new record of $1.77 trillion annual investment. And climate solutions including renewable energy, electric vehicles, hydrogen and carbon capture are yielding consistent growth year-on-year, according to BloombergNEF’s Energy Transition Investment Trends 2024.
Investors such as California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the U.S., are wisely taking note. The fund’s Sustainable Investments 2030 Strategy announcement in 2023 committed to investing $100 billion in climate solutions by the end of 2030, doubling its allocation. In July, CalPERS’ Climate Action Plan announced almost $10 billion in new climate transition efforts, including new private market investments and a customized public equity index.
“A portfolio decarbonized through actions that do not reduce real economy emissions is likely to still be exposed to systemic financial risks.”
NZIF 2.0 reflects this evolution. It references the focus on new asset classes, adding private equity, private debt, and infrastructure approaches to the investors’ toolboxes.
NZIF 2.0 also broadens investments in “Agriculture, Forestry, and Other Land Uses,” recognizing that this is a high-impact sector and that investors are increasingly focused on nature and biodiversity as integral to climate risks and opportunities.
For investment professionals working deep in the trenches of analyzing risks and looking for alpha, NZIF 2.0 helps them navigate the rapidly changing practices of portfolio management to address climate change. For those who care about retirement security, investment trends or how global capital markets are responding to the mega-trend of climate change, NZIF 2.0, and other resources such as Ceres’ new investor guidance on avoided emission, offer insights on reducing emissions in the most impactful sectors and geographies while investing in the net zero emissions future.
A gradual but profound transformation in the investment world
NZIF 2.0 was created by four network partners, AIGCC, Ceres, IGCC and IIGCC, who worked with our respective investor members to develop the framework. Ceres and our global partners have been supporting our investors as they address climate risks and opportunities for their clients and beneficiaries for more than three decades.
As investors gather data, measure risks, construct portfolios, engage portfolio companies, develop climate transition plans, and track progress toward ambitious goals, they are constantly developing new approaches. The ecosystem of investor networks, investment consultants, and data providers respond to these changes in leading investment practices with ongoing tools and guidance.
We are witnessing a transformation in the investment world, and NZIF 2.0 reflects the very latest insights into how investors can innovate their approach to achieving their net zero commitments.
