Countries are increasingly committing to net-zero emissions goals as part of climate planning. In response, the financial sector is also working on how to better manage the risks and opportunities related to delivering an economy wide low-carbon transition. Regulators are working on improving disclosure, for example the UK government recently published a statement making reporting according to the Task Force on Climate Related Financial Disclosure mandatory by 2025.
Financial institutions are moving towards identifying the alignment of their financial provision to net zero outcomes. For investors and lenders, this means assessing risks and opportunities in the transition to a net zero economy, and also demonstrating progress against stated targets to stakeholders. Developing standardised and consistent thinking around metrics to measure alignment is helpful for the financial sector to accelerate the pace of measuring climate alignment.
The Portfolio Alignment Team was formed to respond to growing investor and lender interest in measuring portfolios’ relative alignment to the objectives of the Paris Agreement, and to advance industry efforts to promote widespread adoption of a consistent, robust and decision useful approach.
The methods for measuring portfolio alignment are new and still evolving. At its core, any assessment of the position of a company or portfolio on the transition path is, fundamentally, an assessment of their performance relative to a benchmark – a fraction of the carbon budget allotted to them. This will require common, comparable metrics that meet the following criteria:
- Forward looking: to communicate a direction of travel and give credit to credible efforts by companies to decarbonise
- Decision useful: allowing comparisons of companies and portfolios with peers, tracking progress over time, and incentivising transition
- Robust: analytically rigorous and consistent with climate science
- Broad coverage: across sectors, assets, and end users
- Actionable: methodologically transparent and feasible given data requirements Existing climate-related measures all serve an important purpose for this community and have made important progress in a relatively short time frame, but aren’t as yet forward-looking, robust, decision useful and comparable as they need to be to measure portfolio alignment.
This report presents a critical assessment of the strengths and trade-offs of existing alignment measurement options to climate goals and is an important contribution to the debate. The report reviews seven leading methods: including Arabesque, CDP-WWF Temperature Rating Methodology, Lombard Odier, MSCI, Paris Agreement Capital Transition Assessment (PACTA), Transition Pathway Initiative (TPI), and S&P Trucost. It aims to serve as a basis for discussion in the industry on the approaches to measurement so that by COP 26, investors and creditors can robustly answer how their clients’ money is invested for the transition.