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Cambridge Institute for Sustainability Leadership

July 29 2021 - A new paper from the Investment Leaders Group (ILG) includes a simple, transparent and scientifically robust method of reporting fund alignment with the Paris Agreement on climate change. The proposed ‘temperature score’ estimates the implied temperature rise of portfolios (and their underlying assets) revealing whether they meet the Paris ambition of limiting global warming to well below 2°C.

Understanding the climate performance of investment funds Part 2: A universal temperature score method is the final in a two-part series exploring how investment funds can report their impact on climate stability. The first report found that present forms of disclosure provided by investment managers do not allow investors to understand their alignment with the Paris ambition, nor readily compare and contrast assets and funds. This means they are largely blind to the impact of their holdings on climate stability, something the proposed method aims to address. 

Carola van Lamoen, Head of Sustainable Investing, Robeco, said: 

“Robeco is committed to achieving net zero greenhouse gas emissions across all its assets under management by 2050. A temperature score that shows the global warming potential of investments in degrees Celsius is a powerful tool for taking our clients and broader stakeholders along that journey. As the existing temperature score methodologies are found to lack transparency and comparability, we are pleased with this report that investigates the main building blocks of temperature scores and its creation of a simple and transparent approach to measuring the warming potential of investments. We hope that this report enables the further development of temperature scoring methodologies in an academically rigorous, transparent, and comparable manner, so that they can become a widely used metric in our sector.” 

Despite the economic slow-down from COVID-19, the world is heading towards the second-largest annual increase of energy-related CO2 emission levels globally (IEA, 2021). Coal demand alone is projected to increase by 60 per cent more than all renewables combined in 2021, underpinning a rise in emissions of almost five per cent. 

Increased awareness of climate change has led to a proliferation of tools seeking to quantify the climate performance of investment funds - from carbon intensity to measures designed to report the proportion of an asset’s revenue derived from ‘green solutions’, and various dimensions of climate risk. 

These approaches are useful but for general stakeholder reporting (eg investment clients, beneficiaries, policymakers and the public), an objective, universal measure of climate performance is needed to cut through the stated claims. 

Eric Nietsch, Head of ESG, Asia, Manulife Investment Management, said: 

“Manulife Investment Management believes the climate change will have an imminent and potentially irreversible impact on the global economy, capital markets, and society at large. These impacts will manifest as both risks and opportunities for almost all companies an all industries and therefore must be properly assessed by investors in order to safeguard clients’ assets. The Paris Agreement represents an ambitious global agreement to address climate change, but it’s important to have a clear metric for investors to understand alignment to the Paris goals.”  

The method proposed in this report is guided by the following three principles: 

  • Simplicity: an intuitive method that is easy to understand and communicate, aiming to maximise engagement with policymakers and the general public. 
  • Transparency: complete disclosure of method and assumptions to aid understanding, discussion and replication by non-experts. Does not include 'black boxes' or depend on complex modelling platforms and scenarios. 
  • Robustness: based on the latest scientific evidence of the relationship between cumulative CO2 emissions and global mean temperature increase. 

Dr Jake Reynolds, Executive Director, Sustainable Economy at CISL, said: 

“Disclosure of climate performance is a must for any responsible fund. But the plethora of purposes, tactics, methods and metrics is confusing for the industry, let alone the public. In this report we provide a simple, transparent measure based on sound science, producing results that everyone can understand. We want the industry to converge on a universal measure that all funds can adopt, whether or not they make climate claims. The public deserves to know how their money is being used and this method provides an answer.”

Download the report Understanding the climate performance of investment funds Part 2: A universal temperature score method

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