An analytical framework for a net-zero journey

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.

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?

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.

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.