Your Net-Zero Strategy
Taking your portfolio’s temperature
Investors use forward-looking temperature models to measure and report portfolio temperature rise. Such models estimate the contribution of a portfolio’s projected carbon emissions toward climate change and deliver a temperature value that shows the degree of warming with which those emissions align.
- 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
Measuring implied temperature rise
Investors who are constructing net-zero portfolios may need to know how the current and projected greenhouse gas emissions of companies they’re investing in today align with global goals for preventing the worst effects of climate change. Forward-looking models show with which warming scenario a company’s emissions pathway aligns.
An implied temperature rise model, for instance, help investors take the temperature of portfolios. It translates the projected greenhouse gas emissions of the companies a portfolio comprises into a rise in average global temperatures over the coming decades. The model indicates, for instance, whether a portfolio is likely to keep global warming this century to 1.5°C, which scientists say is the threshold for preventing the worst climate harms.
Investors could use an indicator. Less than 10% of the world’s publicly listed companies had an implied temperature rise of 1.5°C or less, as of Sept. 8, 2021. Less than half aligned with a 2°C temperature rise.
Investors can use implied temperature rise models to build climate-aligned portfolios, set decarbonization targets and support engagement with companies on climate risk. Such models also facilitate reporting for the Task Force on Climate-related Financial Disclosures (TCFD), which recommends that organizations use forward-looking measures when considering the potential financial impacts of a warming climate.
Other forward-looking measures identified by the TCFD include so-called binary target measurements, which assess a portfolio’s alignment with key climate thresholds based on the share of companies in the portfolio that have declared net-zero targets. Benchmark divergence models, another measure, assess the climate alignment of portfolio companies by building benchmarks based on varied temperature scenarios and comparing company’s projected performance against them.
Whichever models investors use, the TCFD suggests a greater focus on indicators that can help investors model the future. The suggestion reflects the reality that efforts to mitigate and adapt to climate change mark a first for society.
Measuring the Temperature of Your Portfolio. How institutional investors can use implied temperature rise to measure and report portfolio temperature rise.
Measuring Portfolio Alignment: Technical Supplement. An assessment by the TCFD’s Portfolio Alignment Team 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.