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Setting a Net-Zero Target

A checklist for climate-aligned investment portfolios

clock 5 minute read

Aligning investment portfolios with global temperature goals encompasses a series of actions. They include measuring the carbon footprint of holdings, analyzing scenarios, identifying opportunities, monitoring alignment. and reporting on progress and outcomes.

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Minimize transition risk

  • Measure the carbon footprint of holdings for Scope 1 and 2 greenhouse gas emissions.
  • Track and lower Scope 3 exposures.
  • 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.

Run scenario analysis

  • Use “what if” analysis to identify areas of portfolio exposures under varying scenarios for climate change.
  • Assess the costs that holdings might be exposed to under different climate scenarios.
  • Integrate insight of the range of downside climate risk into your valuations.

Identify green opportunities

  • Assess the current revenue streams of companies to assess which are generating revenue from low-carbon products and services.
  • Identify companies developing or investing in low-carbon technologies, analyze capital-expense data and how much of it is dedicated to green solutions.

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?

Monitor alignment with global temperature goals

Assess the credibility of companies plans to transition to net-zero across emission types.
Assess the temperature alignment (e.g., 1.5°C) of the companies you invest in.

For each company, consider:

  • Current level of emissions
  • Emission levels over the most-recent decade
  • Forecasted annual emission levels at least 15 years into the future
  • Emission reductions required annually
  • Temperature alignment according to the company’s forecasted emissions pathway

Engage with companies on targets and management

  • Untangle companies’ targets for greenhouse-gas emissions.
  • Assess the company’s ambition versus net-zero goals.
  • Identify leaders and laggards to inform engagement.

Communicate on progress and outcomes

  • Integrate portfolio-wide metrics into the organization’s TCFD report.

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