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Net Zero
Investing:

Columbia
Threadneedle
Investments
ApproachNovember 2022

In 2021, Columbia Threadneedle Investments committed to working in partnership withclients to reach net zero* greenhouse gas emissions by 2050 or sooner across all assets
under management, as a signatory to the Net Zero Asset Managers Initiative.
We are implementing our commitment in stages, aiming for arobust approach by analysing funds and portfolios individuallyand ensuring a thorough governance and approval processes
in the implementation of our net zero methodology. This
paper sets out the approach we are taking, and some of thechallenges and methodological choices we are making.

Principles underpinning our net zero approach
We have identified three principles to guide our approach to net
zero, which have helped with some of the choices we have madealong the way.

This paper sets out our approach to listed equities andcorporate bonds. We also have methodologies in place orunder development for other asset classes.
*Net zero refers to a state in which the greenhouse gases going into the atmosphere are balanced by the removal out of the atmosphere. Source: As of July 2022 https://netzeroclimate.org/what-is-net-zero/1

Net Zero Investing: Columbia Threadneedle Investments Approach

Three principles underpinning our net zero approach1 Focus
2 on real-world
3
1
emissions reductions

We know that we can cut a portfolio’s
carbon intensity dramatically by
selling companies in highly energyintensive sectors like electric utilities
and industrials, and replacing thesewith companies in lower-emissions
industries. But such portfolio changes
alone make little difference in thereal 1world. Our ambition is to use the 1
power of our engagement to influencecompanies to take action – and as
their emissions fall, so too will the
carbon content of our investment
portfolios. However, engagement can’tbe open-ended. If companies fail to
respond, and remain fundamentally
misaligned with a low-carbon future,
we will need to re-consider ourinvestments in them.

2

 ork in partnershipW
31with clients2

We remain committed to working
with clients and other stakeholders
to reach our goal of net zero
emissions across all assets undermanagement by 2050 or sooner andcontinue to discuss our net zero
methodology and the implications
for individual portfolios with1clientsand stakeholders, given the needfor partnership and approvals. We
have provided client briefings on
our methodology and have held
discussions with a number of clients
to work through implementation
options and investment impacts. In
practice, this collaborative approachmeans that it may take time forsome assets to shift to a net zero
approach – which is why we have set
an initial target for a proportion of our
total AUM which will be covered, with
the intention that this will ratchet up
over time.

3 Transparency

The risks of `net zero-washing’ arereal. Methodologies on net zero
investing are still emerging, anddisclosure by corporates is improving
but far from complete. Reaching ourgoal is also subject to companies
operating as expected in relation totransitioning to a net zero economy,
availability of reliable data andmethodologies across all the asset
classes we manage, and potentialchanges in applicable regulationand client preference. In thiscontext, it is important that we arestraight with our clients and wider
stakeholders about limitations in our
approach, including gaps in data or
methodology. We will seek to avoid`black box’ approaches, or simple
metrics which could obscure a more
complex reality.

2

Net Zero Investing: Columbia Threadneedle Investments Approach

Our net zero approach is basedon the Net Zero Investment
Framework, developed by the Paris
Aligned Investment Initiative.

Our approach
The basis for our approach for listed assets (equities andcorporate bonds) is the Net Zero Investment Framework (NZIF),
developed by the Paris Aligned Investment Initiative1.
We helped to develop the Framework, and co-chair an
Implementation Working Group. This group brings together asset
owners and managers to discuss a range of issues
arising as we put the Framework into practice.
In our own implementation, there were a number of issues
and choices, which we set out here, in the interests oftransparency and of informing the investor debate.

Whilst we believe our methodology combines the best quality
data sources we can identify, we believe that – as in otherareas of ESG – data is only the starting point for deeper
analysis. No data source is perfect or can fully reflect thecomplexities of climate change policies at an individualcompany. However, data models do enable portfolio analysis
to be undertaken on a systematic basis, and provide a ‘heatmap’ of where the biggest risks are likely to be – allowing us toprioritise our investment analysis and engagement resources.
The data also allows us to report a range of metrics to
our clients.

Paris Aligned Investment Initiative – Investing for a net zero future. The Paris Aligned Investment Initiative (PAII) was established in May 2019 by the Institutional Investors Group on Climate Change (IIGCC)
to provide a member-led forum to explore how investors can align portfolios to the goals of the Paris Agreement – archiving net zero alignment by 2050 or sooner.

1

3

Net Zero Investing: Columbia Threadneedle Investments Approach

Company-level alignment assessment
Our focus on real-economy reductions led us to place a strong focus on the analysis
of investee company alignment with a forward-looking net zero pathway, and the use of active
stewardship to drive change at those companies not yet aligned.
Data and metrics
To date our model for listed equities and corporate bonds covers
over 7000 companies, and draws in data from a range of sources.
Recognising that data may be imperfect, and also that newcompany commitments will take time to show in the data, we
also have the ability to override the model ratings where there
is publicly available evidence of a company’s policy.

Data sources for company alignment assessment
Climate Action 100+ Benchmark: We see this as the‘gold standard’ of company net zero analysis, and use
these indicators in preference to any other data source,
where available. The Benchmark currently covers 166 of
the world’s largest-emitting companies.
Transition Pathway Initiative (TPI): TPI has a wider
coverage than CA100+, with over 400 companies inhigh-emitting sectors. TPI is a global initiative led byasset owners and supported by asset managers. Aimed
at investors and free to use, it assesses companies’
preparedness for the transition to a low-carbon economy.
Science Based Targets initiative (SBTi): SBTi provides
an independent methodology and approvals process forcompanies to set emissions targets in line with
low-carbon pathways. Its ‘Business Ambition for
1.5°C’ pledge is designed for companies prepared
to commit to the highest ambition level.
Carbon Disclosure Project (CDP): For more than two
decades, CDP has run a global disclosure service, which
now covers climate change, water and forests. Investor
signatories can access a full download of all data
provided in company disclosures.
MSCI ESG: Our main commercial ESG data
provider is MSCI. Uses of this data in our net zero
tool include company emissions data and theanalysis of targets.

4

Net Zero Investing: Columbia Threadneedle Investments Approach

We rate companies in 8 categories (2 of which are only rated for Climate Action 100+ companies). These are based on the alignment
criteria set out in the NZIF, but with some changes, as set out below. Our decisions on which indicators to cover have been based on a
combination of the availability of data and the maturity of assessment methodologies.
NZIF

Columbia
Threadneedle

MetricDescription

■
■
■

1

1

Ambition

Ambition to reach net zero emissions by 2050 or earlier

22Targets – Interim targets set

Short to medium term emissions targets set

3

Targets – Targets aligned

Company targets are driving its emissions intensity consistent with a 1.5 degreeindustry trajectory (Additional Columbia Threadneedle metric – not required by NZIF)■

3

Emissions performance

Current emissions intensity performance, relative to targets
No reliable data yet identified

■
■
■
■

4

4

Disclosure

Disclosure of Scope 1, 2 and material Scope 3 emissions

5

5Strategy

Strategy in place to achieve targets

Capex alignment

Not rated, pending further developments in methodology

7

6

Policy engagement

Lobbying policy is aligned to net zero emissions
Assessed for CA100+ only

■
■
■

8

7

Governance

Board oversight; link between climate change and executive pay

Just transition

Not rated, pending further developments in methodology

Climate risk & accounts

TCFD disclosure
Assessed for CA100+ only

6

9
10

8

■ Columbia Threadneedle core indicators, assessed for all companies, ■ Indicators assessed for CA100+ companies only,■ Indicators not currently assessed
Assessing the ambition of companies’ emissions targets

There are significant challenges in making this calculation, as thedegree of ambition is not always apparent from companies’ owntargets and disclosures. Base years vary significantly, and targets
can take different forms (for instance, absolute versus intensity
targets), as well as covering different scopes of emissions. Some
data sources, such as Climate Action 100+, rate this alignment; inother cases, calculations are needed to fill the gap.
Our net zero model’s assessment of the adequacy of companies’
Scope 1 and 2 targets uses data provided by MSCI ESG, whoprovide a standardised calculation of 2030 commitments. It
compares these company commitments with a 1.5 degree
consistent trajectory. This trajectory is calculated on a sectorspecific basis where possible, recognising that emissions
reductions are more technically challenging in some industries
than others. We take sector emissions reductions rates from theInternational Energy Agency’s 1.5 degree report3. For those notspecified in the report, we use a default rate. We can then constructa net zero aligned trajectory, based on current industry average
emissions intensity, and compare this with the portfolio trajectorythat considers existing company reduction targets. If the company
target is below the net zero trajectory by 2030, then we rate thetarget as ‘aligned’4.
Assessing company emissions targets

Emissions per unitof revenue

Category 3 – Targets Aligned considers whether companies’
medium-term targets are sufficiently ambitious, compared witha 1.5 degree trajectory. Making this judgement is at the core ofassessing whether a company’s climate strategy is fully net zeroaligned, and reflects emerging best practice, such as guidance fromthe Glasgow Financial Alliance for Net Zero on portfolio alignment2.

End 2019

Current year

Sector average emissions intensity

End 2029
Company emissions intensity

Source: Columbia Threadneedle Investments

At this point in time, we have not included Scope 3 data in thisanalysis. We hope to build this in for sectors where Scope 3 isparticularly material, as better quality data becomes available.
However, the model does rate disclosure and target-setting for
Scope 3 emissions for sectors where this is most material.

Source: 2022 Concept Note on Portfolio Alignment Measurement, Glasgow Financial Alliance for Net Zero.
Source: Net Zero by 2050 – Analysis – IEA, May 2021
4
In principle, alignment calculations should be based on cumulative emissions; however we have used point-in-time calculations (in line with, for instance, the Transition Pathway Initiative) for analytical simplicity.
2

35

Net Zero Investing: Columbia Threadneedle Investments Approach

Alignment ratings for companies
Based on the data across these 8 categories, the model
gives companies an overall alignment rating. This is basedon how many of the above expectations the company
meets, with higher standards set for companies in the mostemissions-intensive industries:• Aligned: Company meets expectations highly in all relevant
categories• Aligning: Company meets core expectations arounddisclosure, setting targets and strategy• Committed: Company has not yet met these expectations,but has committed to set a science-based target• Not aligned: Company does not meet expectations, andhas not committed to set a science-based target

Two categories of companies are not given a rating:companies in the lowest-impact sectors from a climate
perspective, and in the finance sector. We see climate change
as a critical issue for financial institutions, but the metrics
used to judge the adequacy of performance are very different
to those for industrial sectors with high direct emissions.
The impact of financial institutions comes primarily throughtheir lending and investment policies, and methodologies tojudge whether these are ‘net zero aligned’ are still relatively
new, with data on Scope 3 financed emissions very limited.
This is an area we will seek to address as our methodology
evolves, using some alternative metrics; in the meantime,
as described below, we have a particular focus on financial
institutions through our engagement.

Portfolio analysis and target setting
Once we have established company alignment status, we cananalyse how this aggregates to portfolio level, and what actions
we will take to improve performance over time.
The pie chart shows a representative breakdown of companies
in each alignment rating, calculated as a percentage of total
portfolio emissions. We will set targets to increase the proportionof companies in the Aligned or Aligning category over time, andwill make active use of stewardship to improve the alignment ofcompanies, aiming to have at least 70% of portfolio emissions
either Aligned or under engagement for the funds committed tousing this net zero framework.

Example of net zero alignment analysis, as a percentage of portfolio emissions
80 80
AlignedAlignedAligning
Aligning
Committed
Committed
NotNotalignedaligned
NotNotassessedassessed

12%12%
45%45%
6% 6%
27%27%
10%10%

70 70
60 60
50 50

AlignedAlignedUnder
engagement
Under
engagement

40 40
30 30
20 20
10 10
0 0

Source: Columbia Threadneedle Investments. Numbers are for illustrative purposes only.

6Net Zero Investing: Columbia Threadneedle Investments Approach

Net zero stewardship
Stewardship lies at the heart of our approach to net zero. We have a broad global engagement
programme, with objectives aligned to those of the Climate Action 100+ benchmark, in addition towhich we have sector-specific expectations, drawing on the work from organisations such as theInstitutional Investors Group on Climate Change (IIGCC) which has developed approaches covering a
number of key high-impact sectors.
Our engagement expectations draw on industry best practicestandards, in particular those set our in the Climate Action
100+ benchmark. We engage both collaboratively throughClimate Action 100+ and other initiatives and one to one
with companies.
For strategies committed to net zero, we aim to have at least
70% of financed emissions aligned or engaged. We will take atiered approach, with the highest-intensity engagement targeted
at a selected subset of high-emitting companies. For thisfocus group, we will consider using escalation strategies, suchas buidling collaborations with other investors or supporting
shareholder resolutions.

emitting companies to encourage them to align with a net zero
trajectory. Those failing to meet minimum standards despite
intensive engagement may be reviewed to see if they are still
suitable to be held in portfolios adopting a new zero approach.
Through impactful and targeted stewardship, we hope to
influence change at the companies we invest in, and as aconsequence achieve improvements in the alignment status ofcompanies over time.

We also have an enterprise-level engagement focus list, where
the goal is to work constructively with globally significant high-7Net Zero Investing: Columbia Threadneedle Investments Approach

Portfolio-level emissions target setting
As well as the asset-level analysis, we also aim to compare portfolio-level emissions with a 1.5 degreealigned trajectory. We see portfolio level data as an accountability tool, to monitor how well ourinvestment and stewardship activities are working in achieving actual reductions in emissions.
Setting a reference pathway
In terms of understanding the required global emissions
reductions, our starting point was the IPCC report, Global Warmingof 1.5°C. This report concluded that in model pathways with no or
limited overshoot of the 1.5°C limit, global CO2 emissions needto decline by about 45% from 2010 levels by 2030 5. Since 2010,
however, global emissions have risen from 47.3 GtCO2e to 52.4
GtCO2e by 2019. Therefore the required global effort is around a
50% cut in emissions from a 2019 baseline by 2030.
The task then is to translate this global trajectory into apathway for individual portfolios. There are some key decision
points here:• Which emissions metric to use• Baseline year and target year
• Whether to account for a portfolio’s start point by using abenchmark-relative approach, or to use a self-decarbonisation
approach• If using a benchmark, which one to selectEmissions metric: In line with best practice from the Platform
for Carbon Accounting Financials, the metric we will focus on
for the emissions trajectory is financed emissions intensity,
expressed as CO2e/$mn invested.

Financed emissions intensity =

Σ (
n
c

current value investment C
issuer’s enterprise value C* issuer’s Scope 1 and Scope 2 GHG emissions )Ccurrent portfolio value (in millions)
The main advantage of this metric is that it is an ownership-based
metric, allowing measurement of an investor’s share of emissions
proportional to its exposure to the investee’s total value.
One downside is that the denominator for calculating theintensity measure, $ million invested, is subject to bothmarket movements and inflation, meaning that emissions
5

intensity is likely to change purely due to these factors even
if nothing changes in the real world. To counter this, we
also plan to monitor absolute emissions, and will seek toapply a normalisation approach to the intensity figure once
methodologies are available. We will also measure and monitor
weighted-average carbon intensity (WACI) as a metric to help
understand climate risk.

IPCC, ‘Special Report: Global Warming of 1.5ºC’, 20188

Net Zero Investing: Columbia Threadneedle Investments Approach

Benchmark-relative versus self-decarbonisation: There are two
types of approach to setting emissions pathways – benchmarkrelative, which means comparing a fund’s emissions to thoseof a net zero-aligned representative benchmark; and selfdecarbonisation, which means cutting a fund’s own emissions
by a given percentage, set in line with a net zero pathway.
We have selected a benchmark-relative approach, on the basisthat this allows us to make an allowance for the starting point foreach fund – meaning that funds that are highly carbon-intensive
to start need to cut emissions by more than those which are
already well below their benchmark. This is consistent with theway we approach target-setting with companies, where we ask for
greater ambition from companies which are above their own sector
average.
Choice of benchmark: There are various options for what
benchmark to compare fund emissions performance with.
Options include:• A benchmark which reflects the whole global economy(such as MSCI World);• Each fund’s own market benchmark;give the most representative starting point for a future emissions
pathway. In our internal model, we have calculated a benchmark
in this way. However, it is analytically complex both to construct
and to communicate, potentially undermining the principle oftransparency.
We have chosen instead to use each fund’s own market
benchmark to construct a future emissions reference pathway.
This has the advantage of consistency with the way we analyseand report financial results. Market benchmarks are alsochosen to reflect the investment universe of the fund, and so arereflective of regional or country restrictions and differences inaverage emissions.
Example of a fund’s emissions performance versus its own market
benchmarkCO2e/$m invested

Baseline and target year: Where possible we will use a baseline
year of end-2019. The target year is end-2029.

• An artificial benchmark, constructed to reflect the sectoral
and/or regional exposure of each individual fund; or• A climate benchmark, such as the EU Paris-Aligned
Benchmark.
There are advantages and disadvantages to each option.
In theory, constructing a benchmark with identical sector
allocations to a fund, but using sector-average emissions, would

End 2019

Current year

End 2029

Benchmark net zero trajectory
Fund
Source: Columbia Threadneedle Investments

9Net Zero Investing: Columbia Threadneedle Investments Approach

The diagram on the previous page shows how these choices
shape the emissions pathway. We will seek to keep fund-levelemissions within the net zero aligned trajectory, which declines by
50% from end-2019 to end-2029. Whilst the target is some years
away, we will monitor and report progress on an ongoing basis.
A key part of monitoring will be to understand not only whatchanges in emissions intensity have happened, but what thereasons for these are. Some changes in intensity may be due
to market movements or inflation (as discussed above); someto sector reallocation or company selection; and some toemissions reductions by our investee companies. In line withthe principle of achieving real-world emissions, we will seek toachieve reductions where possible through the decarbonisationof the companies we choose to invest in.
Finally, there may be circumstances where a fund exceeds thepathway, but we believe this is justified from a climate change
point of view. In particular, this may occur if a fund manager
chooses to invest in some high-emissions companies which
we are confident have a strong net zero alignment strategy, butwhere emissions remain high during a transition period. If thishappens, we will be transparent about the reasons why we havetaken this decision.

6

Investments in solution providers
Net zero methodologies have put a heavy emphasis on the
decarbonisation of portfolios. However, as investors we alsoneed to focus on our role in shifting in capital allocations
toward climate solutions. The scale of capital needed isenormous – for energy systems alone, the International
Energy Agency recently estimated6 that to reach net zero
emissions by 2050, annual clean energy investment
worldwide will need to more than triple by 2030 to around$4 trillion. Investments will also be needed in adaptation to
the changing climate, and to secure emissions cuts in areas
including deforestation and land use.
The EU Taxonomy has provided a methodology for classifying
climate solutions, with work underway in other parts of
the world, such as in Canada and the UK, to develop
similar approaches.
For the funds committed to using the net zero framework, wewill seek to monitor the proportion of portfolios aligned withclimate solutions. More widely across our portfolios, we alsoseek opportunities to invest in solutions, such as significant
investments in the green bonds market.

Net Zero by 2050 – Analysis – IEA, May 2021

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Net Zero Investing: Columbia Threadneedle Investments Approach

Net zero – what next?
Net zero investing has developed extremely rapidly, from being
almost a new concept to covering around half the global
asset management industry now. Industry standards andmethodologies are continuing to evolve, as our understanding ofwhat meaningful net zero investing grows. Gaps in asset classmethodologies are gradually being filled, and data is rapidly
improving, with mandatory climate reporting being introduced ina rising number of jurisdictions.

We will continue to keep track of these changes, and ourown approach will need to be nimble to adapt as the net
zero landscape evolves. In line with our commitment ontransparency, we will seek to share both the opportunities
and the challenges that this new era in investing is bringing,and our success in achieving the real-world outcomes
we are striving for.

Contact us
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Views and opinions have been arrived at by Columbia Threadneedle Investments and should not be considered to be a recommendation
or solicitation to buy or sell any companies that may be mentioned.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to bereliable and are subject to change at any time.

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