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An analytical framework for a net-zero journey

clock 5 minute read

Investors can align investment portfolios with the global goal of reducing GHG emissions to net-zero using a framework designed to assess the resiliency of companies to the decarbonization of the economy. This framework covers four dimensions.

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Minimize transition risk

The primary risks associated with climate change could come from a transition to net-zero emissions. To minimize transition risk:

  • Measure the carbon footprint of holdings for Scope 1, 2 and 3 greenhouse gas emissions.
  • Assess the extent to which those holdings rely on fossil-fuel-based revenues for growth.
  • Assess how management teams at portfolio companies can adapt to evolving regulatory constraints.
  • Calculate the portfolio’s implied temperature.
  • Set a target to decarbonize the portfolio.

Minimize physical risk

Assess the potential damage that a company would be exposed to under different climate scenarios.

For each company, ask:

  • Does the company disclose its physical climate risk?
  • Is the company insured properly?
  • Does the company’s valuation reflect its exposure to climate risk?

Capture sustainable opportunities

Companies that earn a significant share of their revenues from clean energy may face less risk from climate policies that result in the stranding of fossil-fuel assets.

  • Assess green revenues portfoliowide.
  • Identify companies that may be taking the lead in developing technologies that either innovate or scale in proportion to the challenge of achieving global climate goals.
  • Identify opportunities that green bonds may offer to fund movement away from environmentally damaging projects (such as coal-based power generation) toward greener projects.

Ensure 1.5°C alignment

Calculate the contribution of a company’s activities toward climate change.

  • Calculate the implied temperature of companies to determine their alignment with scenarios such as 1.5°C.
  • Compute the portfolio’s implied temperature, which will be a weighted aggregate of the company-level temperatures.

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