The Net Zero Asset Owner Alliance has released the fifth version of its Target-Setting Protocol, introducing a new category of “transition targets” designed to strengthen how institutional investors align portfolios with net zero emissions by 2050.

The revised framework signals a shift from a primary focus on portfolio emissions reduction toward a broader emphasis on real-economy transition. Rather than concentrating solely on lowering financed emissions, the updated protocol encourages asset owners to demonstrate how capital is supporting companies that are actively transitioning toward net zero pathways.

Emissions Reductions to Transition Alignment

Founded in 2019 as a UN-convened initiative, the Alliance now comprises 87 signatories across 19 countries representing more than $9 trillion in assets under management. Its Target-Setting Protocol defines how members set interim targets, typically in five-year cycles, to ensure portfolio alignment with long-term climate goals.

The introduction of transition targets represents a structural addition to the framework. This category focuses on the share of portfolio emissions associated with “transitioning assets,” defined as holdings in high-emitting sectors where companies have credible, Paris-aligned transition strategies in place.

Under the updated protocol, asset owners are required to set targets across at least three of four categories. These now include Engagement Targets, Sector or Transition Targets, Climate Solutions Investment Targets, and Sub-portfolio Emissions Targets. Engagement Targets remain mandatory, reinforcing the Alliance’s long-standing position that active ownership is central to driving emissions reductions in the real economy.

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Defining Credible Transition Plans

To support implementation, the protocol introduces clearer principles for assessing whether a company qualifies as a transitioning asset. Criteria include formal commitments aligned with the Paris Agreement, time-bound science-based targets, integration of climate objectives into governance and internal policies, and evidence of capital expenditure alignment with stated decarbonisation plans.

Additional factors include consistency between corporate lobbying activity and climate goals, as well as transparent reporting on progress. These elements are intended to reduce ambiguity in evaluating transition credibility and to limit the risk of overstating alignment.

By formalising expectations around transition plan quality, the Alliance aims to provide asset owners with a structured approach to differentiate between companies that are genuinely repositioning their business models and those that rely on long-term pledges without near-term operational change.

Integration of Carbon Removals

The updated protocol also expands guidance on the role of carbon removals. While reaffirming that emissions reduction must remain the primary strategy, the framework encourages signatories to support the development of high-integrity carbon removal markets and financing mechanisms.

At the same time, the Alliance maintains restrictions on using carbon removals to meet portfolio-level emissions targets before 2030. This provision reflects continued concern among institutional investors about over-reliance on offsets in place of direct decarbonisation.

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Implications for Institutional Investors

The revised protocol arrives as regulators and beneficiaries increasingly scrutinise the credibility of net zero commitments across the asset management and asset owner landscape. By embedding transition alignment more explicitly into target-setting requirements, the Alliance is attempting to address criticism that portfolio decarbonisation metrics alone do not guarantee real-economy emissions reductions.

For pension funds, insurers and sovereign wealth funds participating in the Alliance, the updated framework raises expectations around transition assessment, engagement depth and capital allocation transparency. It also reinforces the importance of linking portfolio strategy to measurable decarbonisation pathways rather than relying solely on intensity-based metrics.

As climate transition planning becomes more central to prudential regulation and fiduciary interpretation, frameworks such as the Alliance’s Target-Setting Protocol are likely to influence broader market practice beyond its membership base.

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