In its third progress report published at the end of 2023, the Net Zero Asset Owner Alliance (NZAOA) reviews the commitments made by its members. For equity and corporate bond portfolios, the average reduction target by 2025 is set around 27%¹ (with NZAOA recommending reduction targets between 22% to 32% at this time horizon), whether for financed emissions in absolute or carbon intensity. This raises the question of the proportion of the reduction in footprint directly linked to insurers' and asset managers' management actions compared to the portion attributed to natural decarbonization, also called passive decarbonization.

Passive decarbonization refers here to reductions in greenhouse gas emissions from companies (changes in processes, supply chains, or energy sources, etc.).

Impact of passive decarbonization of portfolios over the last few years

To shed light on this question, we analysed the evolution of the carbon footprint of a portfolio with constant outstanding, replicating the Euro Stoxx 50² evenly distributed over the period 2018-2022.

We particularly calculated the carbon footprint of this portfolio in value and monetary intensity, firstly considering scopes 1 and 2 emissions, as most institutions did when setting their initial intermediate targets. For intensity, we considered the two most commonly used approaches, based respectively on turnover and enterprise value (EVIC - Enterprise Value Including Cash).

With a constant portfolio composition, scopes 1 and 2 emissions expressed in tons of CO2 equivalent decrease by 18% between 2018 and 2022, with a low point in 2020, directly related to the Covid-19 crisis which causes emissions to fall by 11% compared to the previous year.

However, the decline in emissions is reflected differently in carbon intensity indicators: 

• While emissions decrease over the period, average turnover increases by 17%. The trend observed on each of the parameters therefore allows a very significant decrease in carbon intensity per turnover of around 35%.
  It's noteworthy that the Covid-19 crisis is less perceptible here due to the alignment between the reduction in emissions and revenue, which stabilizes the ratio in an economic slowdown context.
• The carbon intensity per EVIC decreases by 26% over the period with an evolution which can be analysed in two phases: (i) a first phase between 2018 and 2021 where the increase in EVIC, coupled with the decrease in emissions, leads to a decrease in intensity of 34% and (ii) a particularly marked year in 2022 characterized by a drop in stock prices that increases the intensity by about 13%.
  The Covid-19 impact is still observable here, with a 12% decrease in intensity in 2020, but appears less pronounced due to a relative stability of this intensity in 2021 explained by the continued increase in EVIC offset by a slight resurgence in emissions.

We can also analyse the evolution in more detail:

Some extreme cases can be observed within the portfolio, such as an industrial company, whose footprint varies very little over the period. Oil companies, on the other hand, are seeing their carbon intensity evolve, notably as a result of changes in commodity prices.

It can be noted that among the 38 non-financial companies constituting our sample, more than 60% are committed to reducing their scopes 1 and 2 emissions according to the SBTi methodology, which should contribute to the observed results.

Thus, for the considered sample and over the observed time horizon, corporate decarbonization is significant and would contribute to achieving the decarbonization targets of an investment portfolio, with the majority of NZAOA members having set targets for scopes 1 and 2 emissions only by 2025.

The particular case of scope 3 emissions, a different conclusion

In our analysis of measuring the passive decarbonization of the sample portfolio, despite our initial ambition, we did not include companies' scope 3 emissions. While the quality and completeness of scope 3 emission data have certainly improved in recent years, it remains too variable over the analysis period.

Indeed, over the studied period, we see that the scope 3 emissions of around ten non-financial companies increases by over 200%, with in particular several hundred million tons of CO2 equivalent increase for transport sector. Significant variations are also observable for several companies, which may explain a non-uniform trend in the evolution of this parameter over the period.

Thus, considering scope 3 in their carbon footprint measurement since 2018, it only increases, with the decrease generated in scopes 1 and 2 (-18% as presented above) being completely overshadowed by the increase in scope 3 over the years (+62% between 2018 and 2022). It is difficult to determine whether this is due to improvements in calculation methods and the perimeter covered on companies' scope 3 or to other factors.

Even though these data appear unstable over the period considered, it now seems essential to include scope 3 in carbon footprint calculations and in setting 2030 targets. This approach indeed allows for an exhaustive view of the impact of financed emissions, which is particularly relevant for sectors where scope 3 represents the bulk of emissions (for example, the automotive sector).

The need for active management of the carbon dimension

Given the observed trends in recent years, setting new objectives between -23% and -37% for the period 2025-2030, as recommended by NZAOA³, still appears ambitious. In our view, passive decarbonization alone will not be sufficient, and insurers, asset managers and financing banks will necessarily have to identify and, more importantly, implement levers to manage their carbon footprint with a breakdown in management rules. 

We have developed a methodology to project the evolution of portfolios carbon footprints considering various assumptions and parameters. These works can be used for defining decarbonization targets as well as for closely monitoring footprint evolution through the calibration of different scenarios (taking into account companies' decarbonization commitments, arbitrage between counterparties, constant outstanding or following financial institution projections, etc.).

The use of identified decarbonization levers and the combination of their effects require a thorough analysis to ensure their effectiveness.

Similarly, given the multiple environmental concerns (e.g. companies' water consumption, waste management, etc.), it is important to maintain a uniform and consistent overall approach. Although portfolio decarbonization requires granular analysis focused on counterparties' carbon intensities, financing transition or protecting biodiversity are criteria that can sometimes significantly shade the assessment of a counterparty. Added to these are the usual performance criteria (especially for benchmarked management) and risk criteria (such as concentration risk) that must be considered for informed decision-making.

In conclusion

Integrating the carbon dimension into the usual criteria for monitoring and managing portfolios is crucial to ensure the achievement of decarbonization targets that insurers and asset managers must set. While passive decarbonization may have played a significant role at this stage, it is essential to implement active management of portfolio carbon footprints based on detailed portfolio analysis, without neglecting other economic and environmental considerations

Notes and references

¹ Increasing Climate Ambition, Decreasing Emissions: The third progress report of the Net-Zero Asset Owner Alliance – United Nations Environment – Finance Initiative (unepfi.org) – page 19

² As at end of March 2024, index composed of the following companies : Deutsche Telekom AG, Adidas AG, Bayerische Motoren Werke Aktiengesellschaft, Ferrari N.V., Hermes International S.C.A., Industria de Diseno Textil, S.A., KERING SA, LVMH Moet Hennessy Louis Vuitton SE, Mercedes-Benz Group AG, Prosus N.V., Stellantis N.V., Volkswagen Aktiengesellschaft, Anheuser-Busch Companies LLC, Danone SA, Koninklijke Ahold Delhaize N.V., L'Oreal SA, Pernod Ricard SA, ENI S.P.A., TotalEnergies SE, Bayer Aktiengesellschaft, Essilorluxottica SA, Sanofi SA, Airbus SE, Compagnie De Saint-Gobain SA, Deutsche Post AG, SAFRAN SA, Schneider Electric SE, Siemens Aktiengesellschaft, VINCI SA, Wolters Kluwer N.V., ASML Holding N.V., Infineon Technologies AG, Nokia Oyj, SAP SE, BASF SE, L'air Liquide SA, ENEL – SPA, Iberdrola, S.A., Adyen N.V., Allianz SE, AXA SA, Banco Bilbao Vizcaya Argentaria S.A., Banco Santander S.A., BNP Paribas, Deutsche Boerse Aktiengesellschaft, ING Groep N.V., Intesa Sanpaolo SPA, Muenchener Rueckversicherungs-Gesellschaft Aktiengesellschaft in Muenchen, Nordea Bank Abp, UniCredit Bank GmbH

³ Range of -40% to -60% between 2020 and 2030 defined by NZAOA transposed to a different time horizon