Considering sustainability factors as a component of proper investing appears to me both necessary and unobjectionable. This applies to both ESG integration into investment decisions as well as active ownership.
In focus
10/11/2022
Considering sustainability factors as a component of proper investing appears to me both necessary and unobjectionable. This applies to both ESG integration into investment decisions as well as active ownership.
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We explain some of the most important climate-related financial initiatives – including their focus and what they seek to achieve
10/11/2022
We explain some of the most important climate-related financial initiatives – including their focus and what they seek to achieve
10/11/2022
Jack Bowles
Associate Investment Director, Sustainability, ESG
Climate change is one of the greatest challenges facing humanity. It is also a phenomenally complex problem.
In the quest to solve it, firms try to drive change guided by a plethora of frameworks and initiatives. The financial sector is no exception.
The burgeoning number of such frameworks can be off-putting, especially when coupled with excess use of acronyms. There is a risk of confusion around what each framework seeks to achieve, as well as duplication.
As one of the first and largest investment houses to have our climate targets validated by the Science Based Targets initiative (SBTi), we have become acquainted with a number of these initiatives.
Understanding them, their origins and objectives is critical in making effective strategic decisions over how to get to net zero.
The purpose of this guide is to provide insight into some of the key climate and net zero frameworks. These are outlined in Table 1; treat it as a cheat sheet for future reference.
To help navigate the document, some of the frameworks are mapped to the four steps we use when engaging with our portfolio companies and clients on their approach to reaching net zero:
Topic: net zero
Type: commitment
Sector focus: Asset Owners
Signatories/ supporting organisations: 74 institutional investors
Geographic footprint: global
Purpose: to drive the development of industry best practice around net zero through its integration into its members’ investment mandates.
Summary: Established in early 2019, the UN-convened alliance brings together some of the largest Asset Owners globally to promote the strategic alignment of capital to support and enable the net zero transition. The second edition of its four-part target-setting protocol introduced the absolute emissions reductions requirements for 2025 and 2030, and aims to steer members to reach their net zero commitments through:
Though currently focused on corporate targets, the protocol is going through an improvement to include sovereign debt as an asset class.
Insight:
Weblink: UN-convened Net-Zero Asset Owner Alliance – United Nations Environment – Finance Initiative (unepfi.org)
Topic: net zero
Type: commitment
Sector focus: Asset Managers
Signatories/ supporting organisations: 273 asset managers
Geographic footprint: global
Purpose: to support the investment industry in reaching the goal of net zero greenhouse gas emissions by 2050 or sooner.
Summary: established in 2020 following the launch of the NZAOA (see above), NZAMI provides a consistent approach for investment managers to establish a net zero commitment. Signatories are accountable for the delivery of three commitments:
These are underpinned by 10 objectives, ranging from the establishment of an interim 2030 target, to providing the necessary data and analytics to asset owner clients, and reporting in-line with the TCFD.
Insight: NZAMI also provides investment managers with a platform for collaborative engagement with portfolio companies. It is not as prescriptive as the NZAOA in its target-setting requirements since it does not mandate a percentage reduction in portfolio emissions.
Weblink: The Net Zero Asset Managers initiative – An international group of asset managers committed to supporting the goal of net zero greenhouse gas emissions
Topic: net zero
Type: target setting protocol
Sector focus: sector specific (specific guidance for different sectors)
Signatories/ supporting organisations: 3526 companies taking action
Geographic footprint: global
Purpose: to provide a consistent approach to the setting of emissions reductions and net zero targets in line with climate science.
Summary: the SBTi is a partnership between CDP, the United Nations Global Company (UNGC), the World Resources Initiative (WRI) and the World Wide Fund for Nature (WWF). It provides sector-specific methodologies and guidance for setting science-based targets that show organisations how quickly they need to reduce their GHG emissions in order to reach net zero by 2050. Targets are deemed to be ‘science-based’ if they are align with what the latest climate science deems necessary to meet the goals of the Paris Agreement. The setting of a science-based target involves a 5-step process:
The inclusion of validation provides comfort to investors on the reliability of the established target.
Insight:
Weblink: Ambitious corporate climate action – Science Based Targets
Topic: net zero
Type: framework
Sector focus: Asset Managers and Asset Owners
Signatories/ supporting organisations: 60 Asset Owners committed, 55% of NZAMI signatories use NZIF*
Geographic footprint: European, though moving global
Purpose: ensure investors can decarbonise investment portfolios and increase investment in climate solutions, in a way that is consistent with a 1.5°C net zero emissions future.
Summary: Developed by the Paris Aligned Investment Initiative (PAII), a collaboration of investor networks, the NZIF aims to support investors in maximising their contribution to real-world emissions reductions. The framework focuses on 6 key areas to provide investors with a holistic approach to the integration of net zero strategy into their business models:
The framework recommends three targeting methodologies, including those from the SBTi, Transition Pathway Initiative (TPI) and Climate Action 100+ (CA100+).
Insight: as the framework does not provide a target-setting/decarbonisation calculation methodology, the robustness of investor commitments is dependent on companies establishing targets using one of the three aforementioned protocols.
Weblink: Paris Aligned Investment Initiative – IIGCC
*Source: IIGCC. As at 15/08/22.
Topic: net zero
Type: framework
Sector focus: sector agnostic
Signatories/ supporting organisations: 700 institutional investors
Geographic footprint: global
Purpose: to hold the highest global carbon emitters to account, and push them to take action on climate change.
Summary: Established by a collaboration of investor networks, the CA100+ provides investors with insight into how the worlds largest carbon emitters are tackling climate change. The CA100+ uses its Net Zero company benchmark to evaluate its 100+ Focus Companies performance against two types of indicators: Disclosure Framework indicators (that evaluate the adequacy of corporate disclosure), and Alignment Assessments (that evaluate the alignment of company actions with the Paris Agreements goals).
The metrics in the Disclosure Framework are published by the focus companies themselves and aggregated by the Transition Pathway Initiative (TPI), whilst different elements of the Alignment Assessment are performed by the different data providers that support the initiative. The combination of these scores provides investors with a platform for engagement with the Focus Companies on climate change.
Insight: the approach follows a similar methodology to that of the TPI’s management score and assessment of alignment to the Paris Agreement.
Weblink: Climate Action 100+
Topic: climate-related risk and opportunities
Type: framework
Sector focus: sector agnostic
Signatories/ supporting organisations: >2,600 globally (financial and non-financial)
Geographic footprint: global
Purpose: to drive the consideration and integration of the financial risks and opportunities associated with climate change in both financial and non-financial companies.
Summary: Established in 2015 following the Paris Agreement, the framework aims to provide a consistent approach for companies to integrate the consideration of climate-related risks and opportunities into their business models. This integration focuses on four pillars, with a number of recommendations underpinning them:
The use of the four pillars helps to encourage the integration of climate considerations throughout the business. Originally a voluntary framework, regulators globally are using its principles as a base for the creation of their climate reporting obligations.
Insight: due to its formulaic structure the TCFD framework can be repetitive. When drafting your TCFD report, consider cross-referencing to corresponding content in other pillars to aid the reader and reduce the length of the document.
Weblink: Task Force on Climate-Related Financial Disclosures | TCFD) (fsb-tcfd.org)
Topic: environmental disclosure (climate, forests and water)
Type: reporting platform
Sector focus: sector specific (specific questions for different sectors)
Signatories/ supporting organisations: 13000+ companies and 1,100+ cities, states and regions
Geographic footprint: global
Purpose: to focus investors, companies, cities and governments on building a sustainable economy by measuring and acting on their environmental impact.
Summary: due to its establishment in 2000, the CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. Due to its history, the CDP now has one of the most comprehensive environmental datasets globally. By responding to a number of questions, that cover both breadth and depth of a companies operations, the system provides a score for each discloser; from A (leader) to D- (laggard). Originally focused purely on climate, the system has been extended to include both forests and water (hence the rebrand). Though only climate currently contributes to a company’s score, this is expected to change from 2023.
Insight: as a self-reporting tool, CDP has been criticised for its reliability. This is, however, becoming less of a concern given rising regulatory and investor scrutiny on the robustness of public disclosures on environmental impact.
Weblink: Home – CDP
Topic: greenhouse gas emissions accounting
Type: accounting standard
Sector focus: Financial Institutions
Signatories/ supporting organisations: >250 signatories
Geographic footprint: global
Purpose: to enable the consistent measurement and reporting of greenhouse gas emissions by the financial industry.
Summary: starting in the Netherlands in 2015, the standard became global in 2019 and provides a consistent methodology for the calculation of financed emissions by financial institutions, from banks to pension funds. Currently, the standard covers the calculation of financed emissions across:
Given the complexities, PCAF are still consulting the industry regarding the treatment of emissions from sovereign bonds.
Insight: the PCAF standard underpins the calculation methodology used in the SBTi. Despite using differing terminology from the TCFD for its climate metrics (e.g. SBTi use ‘Portfolio intensity,’ whilst the TCFD refers to the same metric as Carbon Footprint), their calculation methodologies are aligned.
Weblink: PCAF: Enabling financial institutions to assess greenhouse gas emissions | PCAF (carbonaccountingfinancials.com)
Topic: Paris Agreement alignment
Type: reporting platform
Sector focus: sector agnostic
Signatories/ supporting organisations: 131
Geographic footprint: global
Purpose: to assess companies’ preparedness for the transition to a low-carbon economy, supporting efforts to address climate change.
Summary: launched in 2017, the TPI is an asset-owner led reporting initiative, supported by asset managers, that aims to measure the alignment of some of the largest polluters business models to the objectives of the Paris Agreement. This is executed through a two-part assessment:
The tool is free for investors to use and monitors almost 500 companies; using FTSE Russel as its data provider.
Insight: the TPI and FTSE Russel have come together to produce a ‘Climate Transition Index Series’ that aims to assess companies’ preparedness to a low-carbon economy. In 2019, the Church of England Pensions Board (a founder of the TPI) allocated £60m to the index1.
Weblink: Home – Transition Pathway Initiative
1FTSE TPI Climate Transition Index, 2019.
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