All investors need to be able to understand the alignment of their fund with the Paris agreement. Doing so would be made possible if the there was uniformity in reporting portfolio temperature alignment and the metrics used to report climate performance were simple and understandable to all investors – even non-experts. Research from the University of Cambridge Institute for Sustainability Leadership looks at the current approaches used by market leading funds to measure climate performance and makes the case for a universal disclosure of Paris alignment.
While the pandemic has shrunken global economic activity, it has also highlighted the need for a green recovery, and momentum has slowly grown - evident from the increase in the demand for sustainable funds despite the market turmoil. With the US making an official return to the Paris climate accord and the resumption of COP26 in November 2021, the climate crisis will again be at the centre of conversations around the world and it is no surprise that investors are increasingly interested in the impact of their investments on global temperature rise.
The trend towards incorporating climate evaluation in investment decisions will only rise, driven by regulated reporting frameworks such as the SFDR which mandates adverse impact reporting for green funds, and a surge of individual investors and asset ownerswho want their money invested with climate in mind. Alongside investor's desire to align their portfolios with their values, it is also in the best interests of the investment management industry to build resilience to climate risks and stop further temperature rise. Research conducted by Cornerstone Capital Group for example found that $3-24 trillion or 2-17% of global financial assets are exposed to financial risk and loss stemming from climate change.
Reporting climate performance: What does good look like?
To make more sustainable investment decisions, investors need to know whether their holdings help or harm the stability of the climate. Clearly, to be informed investors therefore need access to material data via reporting. But, crucially, they also need this information presented in a way that’s comparable and easily understood by investors and non-experts.
While reporting each method has its uses, the diversity of approaches makes comparison difficult.
Trends such as investor demand and regulation for better non-financial data disclosure are driving better availability and accuracy of corporate climate-related data. But recent analysis from global investors network the Investment Leaders Group (ILG) shows that present disclosure does not allow investors to understand and compare the alignment of funds with the Paris Agreement. The report analyses a series of market leading sustsinability funds and finds a plethora of ways are currently used to report climate performance: from reported carbon intensity, to the percentage of assets aligned with the Paris Agreement and exposure to climate risks. While reporting each method has its uses, the diversity of approaches makes comparison difficult. Furthermore, not all reporting approaches give investors a clear picture of their impact on the climate. Whilst benchmarking emissions shows the relative performance of one fund against another, this does not indicate whether asset performance is in line with the Paris ambition. It may well be that both funds have poor climate performance in absolute terms, but investors are not easily able to make that judgment with the tools at hand.
Why a temperature score should be included as a basic reporting requirement for all funds
This problem would be addressed if the industry adopted a universal measure to judge alignment of funds with the Paris ambition. In sequence to the Framework’s basic metric which provides a picture of a fund’s carbon footprint, CISL are working with the ILG to develop a simple, transparent and scientifically robust method which converts available emissions data into a ‘temperature score’ that associates a fund with a specific level of global warming in °C. Such a metric offers a meaningful, outcome-based measure that reveals instantly how a portfolio aligns with the Paris ambition – keeping global mean temperature rise well below 2°C between now and 2050. Without such disclosure, investors remain blind to the impact of their holdings on climate stability.
CISL are working with the ILG to develop a proposed temperature scoring methodology to be incorporated into the Navigator and, in doing so, will update the current Climate Stability metric in the Navigator to reflect the latest thinking and research from CISL.
About the author
Lucy Auden is the Senior Programme Manager for the Investment Leaders Group, a group of asset managers, owners and consultants committed to progressing sustainable investment practice through leadership, creation of actionable insights and world class research. Prior to joining CISL, Lucy was Head of ESG for real estate fund manager, Savills Investment Management, where she spent 8 years building the company's responsible investment approach. Lucy has a Master’s in Environment and Sustainable Development from the Development Planning Unit, the Bartlett, University College London during which she spent time in Freetown, Sierra Leone co-producing sustainable urban development strategies with civic, government and academic stakeholders.
Articles on the blog written by employees of the University of Cambridge Institute for Sustainability Leadership (CISL) do not necessarily represent the views of, or endorsement by, the Institute or the wider University of Cambridge.
Senior Programme Manager