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You are here: Home / News / Climate Strategies and Metrics

Climate Strategies and Metrics

This report reviews the strategies and metrics available to investors seeking to measure and improve the climate friendliness of their portfolios, defined as the intent to reduce GHG emissions and aid the transition to a low-carbon economy through investment activities. An investor strategy for climate friendliness encompasses a set of activities, an approach for positioning and signaling, and the metrics to support the strategy.


EXECUTIVE SUMMARY


Background. Climate change is an increasingly prominent issue for institutional investors. In September 2014, two investor climate pledges were announced: United Nations Principles for Responsible Investment’s (UNPRI) Montreal Pledge focused on mobilizing investors to measure and disclose the carbon footprint of their portfolios and the Portfolio Decarbonization Coalition (PDC), led by CDP and the United Nations Environment Programme Finance Initiative (UNEP-FI), focused on decarbonizing portfolios. These initiatives are complemented by a range of other investor actions including engagement platforms and policy lobbying.

This report reviews the strategies and metrics available to investors seeking to measure and improve the climate friendliness of their portfolios, defined as the intent to reduce GHG emissions and aid the transition to a low-carbon economy through investment activities. An investor strategy for climate friendliness encompasses a set of activities, an approach for positioning and signaling, and the metrics to support the strategy as summarized in Fig.0.1. This report first distinguishes climate friendliness from carbon risk (Chapter 1). It then explores how investors can increase their climate friendliness by asset class (Chapter 2) and achieve a climate impact, defined as GHG emissions reductions in the real economy through positioning and signaling (Chapter 3). Finally, the report assesses the landscape of available metrics and their suitability for each strategy (Chapter 4) and concludes with a summary and possible future developments (Chapter 5).

Distinguishing objectives . Chapter 1 discusses two objectives behind investormobilization on climate:

• Carbon risk, a business objective, is the concept that the low-carbon economy may create financial risks and opportunities for portfolios. These risks and opportunities are driven by changes in climate policies, the associated economic value chain, changes in technology, and corporate decisions that impact financial portfolios.
• Climate friendliness, a societal objective, is the concept that investors seek to contribute to greenhouse gas (GHG) emissions reductions and the transition to a low-carbon economy because of internal or external pressures such as mission,mandates, or fiduciary duty.

Metrics commonly used as indicators of carbon risk are different from those used for climate friendliness. Yet recent investor pledges combine carbon risk and climate friendliness objectives, suggesting that portfolio disclosure and investment strategies on climate respond to both perceived growing carbon risks as well as to the broader momentum around global action on climate change. France has recently gone beyond voluntary pledges by passing a law mandating that investors and banks report on the carbon risks and climate friendliness of their portfolios, with disclosures separated between carbon risk and friendliness objectives.

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Available activities. Chapter 2 addresses two types of climate friendly activities that respond to the objectives:

• Climate friendly portfolio construction. Portfolio allocation decisions can impact the cost and availability of capital in favor of lower-carbon and climate-friendlier companies, projects, or assets and can influence investees toward climate-friendly behavior.
• Climate friendly engagement. Investors can influence corporate behavior and the capital allocation decisions of their investees through shareholder engagement. Although investors can hypothetically influence companies and public sector bond issuers through the bond market, this strategy is generally limited to the listed (public) and private equity space.

Connecting the dots between asset classes and investor strategies. Climate-friendly activities should be connected with the asset classes where they will be most relevant (Table 0.1). Investor options are defined by the liquidity of the asset class and whether they constitute ownership. Without ownership, activities are limited to portfolio construction activities (mainly negative or positive screens/targets and preferential financing conditions), whereas ownership offers the possibility of shareholder engagement. This report does not address a number of assets in the typical institutional investor’s portfolio, notably cash, sovereign bonds, or other alternatives, such as commodities, and hedge funds either because of their lack of materiality to climate issues, their marginal share in an institutional investor’s portfolio, or the inability of existing frameworks to inform climate-friendly activities.

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To download the full report, please click here.

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