Your Net-Zero Strategy
Measuring the climate-alignment of your portfolio
5 minute read Investors need quantitative data that allows them to assess the vulnerability or resilience to climate change of every asset, so they can value both risks and opportunities. The challenge is to find the most meaningful information amid the varying and, at times, limited disclosures.
- Finding the emissions in private equity and debt funds
- How climate risk could affect corporate bonds
- How climate change could impact credit risk
- Aligning private equity portfolios with net-zero
- Getting to net-zero for endowments
- Taking your portfolio’s temperature
- Addressing climate risk through engagement
- Unpacking climate-related risks and opportunities
- Measuring the climate-alignment of your portfolio
- Categorizing climate-related financial risk
- Climate risk in equity and fixed income portfolios
- Aligning with TCFD recommendations
What data do investors need?
MSCI believes that investors need to be able to measure companies’ complete carbon footprints. That includes companies’ direct and supply-chain emissions, as well as those caused by use of their products and the emissions of their largest suppliers. Investors also need to know the location of companies’ largest facilities and how companies might be helped or hurt by the transition to a net-zero economy. That may include data that helps investors determine, for example, how warming might affect the agricultural yield of a portfolio of farmland. Or whether changes in regulatory requirements or a shift in demand could strand fossil-fuel assets. Or the vulnerability of a company’s facilities to extreme weather or flooding.
Investors use such data to:
- Construct portfolios, manage risk and report to stakeholders
- Engage portfolio companies
- Assess progress on climate commitments and net-zero targets
The TCFD recommends that companies disclose the metrics and targets used to assess and manage climate-related risks and opportunities. In June 2021, the TCFD proposed to update its guidance on disclosure to emphasize the need for simple, forward-looking metrics that can help investors assess the alignment of companies and portfolios with global temperature targets.
While a growing number of companies are committing to a net-zero pathway, the decarbonization targets that companies do set vary by the business activities they cover, feasibility and timeline. Some banks, for instance, have yet to report emissions from the projects they finance; this is a category that contributes the largest portion of their carbon footprint. Such omissions can leave investors struggling to assess the potential impact of targets on the climate risks companies face.
Among the goals of the COP26 conference this November will be to promote sustainable and scalable investments. To achieve that aim, policymakers will be looking to strengthen and standardize climate-related financial reporting. That would help to provide investors with the measurements they need to inform decision-making.
The following questions can help investors throughout their net-zero journey:
- What proportion of companies in the portfolio have net-zero targets?
- How do those targets compare with 1.5°C targets set by companies within their industry or sector?
- Based on deviations from the sector targets, what is the temperature of the portfolio?
Continue reading
Measuring Portfolio Alignment, Technical Considerations. A report by the TCFD’s Portfolio Alignment Team on best practices for metrics that financial institutions use to align their activities with the goal of limiting global temperature rise to 1.5°C (October 2021).
Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans. Guidance from the TCFD for organizations seeking to establish relevant metrics, targets, and transition plans around their climate-related risks and opportunities (June 2021)
Measuring Portfolio Alignment: Technical Supplement. An assessment from the TCFD of the strengths and trade-offs of the options available when using forward-looking metrics to measure the alignment of financial portfolios with climate goals (June 2021)
Charting a New Climate. Technical guidance and information on the resources available to support forward-looking scenario-based assessments by banks of climate-related physical risks and opportunities, published by the U.N. Environment Programme Finance Initiative.
