2021 ESG Annual Report

4. Engagement with corporations is a necessary tool to influence real economy emissions. We believe that companies should consider the long-term impact of climate change on their business model and operations, and that all issuers should identify key environmental risks to their business. Divestment is one tool in our arsenal, but as active managers, we know that targeted climate engagement can yield effective results. 5. In a net-zero state, avoided emissions cannot be used as offsets because emissions must be balanced by permanent carbon removal. However, avoided emissions can still serve as an important marker of the impact of climate solutions. Avoided emissions occur when a product or service is substituted by a less carbon- intensive alternative. Our impact strategies measure avoided emissions as part of their climate solutions analysis. 6. Carbon allowances (regulated instruments used in cap-and-trade schemes) or carbon removal units are the only viable instruments to achieve net-zero alignment, according to industry associations such as the Institutional Investors Group on Climate Change. Target Setting and Implementation Ultimately, we are committed to partnering with our clients as they increasingly seek to have their assets managed in line with a net-zero objective. To achieve this ambitious goal, we have focused on setting a robust interim target and measurement process. First, we worked with our ESG Advisory Council, who advised us to set an absolute carbon reduction target that is flexible across asset classes, geographies and sectors. Thus, we adopted carbon footprint over carbon intensity as our emissions metric and normalized the emissions value by the portfolio’s market value adjusted for any change in asset flows over time. In the context of ‘fair share’, we adopted a capability approach, encouraging each net-zero committed portfolio manager to reduce financed emissions to the extent of their ability, guided by our net-zero sector alignment indicators.

Second, we aimed to set a target that is realistic within the constraints in which we operate, including real economy emissions trajectories and data limitations. Our interim target is set in the expectation that governments will follow through on their own commitments to ensure the objectives of the Paris Agreement. To maximize the ambition of our target, we chose to include material Scope 3 emissions in our target-setting approach, but recognize that data availability and integrity needs to improve over time. Furthermore, we acknowledge that the current lag in emissions data disclosure may present a challenge to net-zero reporting, but are hopeful that increasing regulatory requirements globally to report on climate-related metrics will better align these timelines. Despite these data challenges, we believe that keeping a consistent methodology over time appropriately estimates a fund’s carbon footprint evolution. We are likewise working on alternative estimation methods for our sovereign and private equity portfolios. Given all these considerations, our net-zero committed portfolio managers can choose from the following two target options: A. 50% reduction in carbon footprint across Scope 1, 2 and material Scope 3 emissions by 2030 relative to a 2019 baseline and a subsequent decline to net zero by 2050. OR B. Achieve >90% of portfolio (by value) with science-based (SBTi) validated targets (or equivalent as assessed by NB’s net-zero sector alignment methodology which conforms with the IIGCC target-setting guidance) by 2030 and to achieve 100% of the Portfolio’s AUM by 2050. AND Minimum 30% reduction in carbon footprint across Scope 1, 2 and material Scope 3 emissions by 2030 relative to a 2019 baseline and a subsequent decline to net zero by 2050.


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