Investment Portfolio Carbon Impact

Part Two of a 4 part series based on our recent ESG summit focusing on carbon impact reporting.

  • Attendees and panelists at Style Analytics’ recent “Reworking ESG” summit in New York City examined standardized measurements for the ‘E’ in ESG.
  • Focus on measuring carbon impact by companies along with carbon reporting.

The vital importance of carbon impact measures for financial portfolios is now front and center. Evidence of climate change’s impact on society’s assets brings the problem into sharp financial focus. Even pension funds that have long eschewed ESG as an investment approach because of fears of undermining fiduciary responsibility of maximizing returns now see the risk of ignoring ESG assessments.

The industry’s standardization on CO2-equivalent as the metric of choice and the subsequent widespread adoption of carbon intensity disclosures, offers part of the solution to the biggest existential risk our industry has ever faced.

The Threat: Climate damage potential – beyond the point of no return

Climate change is having a staggering impact on oceans and ice-filled coastal areas. The UN’s Intergovernmental Panel on Climate Change (IPCC) states we have already gone beyond the point of no return in terms of economic damage to cities like Los Angeles. Punishing once-in-a-hundred-year floods will become an annual occurrence in island nations and several large cities around the world.

UN General Secretary António Guterres told world leaders “Even our language has to adapt: What once was called ‘climate change’ is now truly a ‘climate crisis.’ … We are seeing unprecedented temperatures, unrelenting storms and undeniable science.”

[caption id="attachment_7605" align="alignnone" width="1024"] Figure 1: Global Net CO2 emission scenarios showing the stark difference between current trajectory / pledges in the red zone, the +2C path in dashed light-blue and the +1.5C path in solid dark blue until 2100.[/caption]


The economic impact of the IPCC report’s concluded:

  • Global sea levels rising faster than estimated just a few years ago,
  • Supercharged ‘monster storms’ that can cause harsh economic damage to vulnerable infrastructure, and
  • Deadly marine heat waves.

The list of global cities most vulnerable to sea level rises includes Jakarta, Manila, Bangkok, Lima, Singapore, Barcelona and Sydney while the list of US cities includes Los Angeles, Miami, Savannah, Honolulu, San Juan, Key West and San Diego.

Business and industry leaders are taking heed of the warnings.  So far in 2020:

  • BlackRock announced that all of its actively managed portfolios would include ESG assessments as part of its investment decision making
  • Microsoft announced it is to be net carbon-zero over its entire lifetime by 2050
  • Davos Forum’s Executive Chairman sought all participating companies to commit to becoming carbon-neutral by 2050.

80% of the summit’s attendees believe that ESG fits in the construction phase and in portfolio analytics/reporting. Only 20% said that it fits within active ownership effort.

The Response: Carbon impact analysis

The UN’s Principles of Responsible Investing (PRI) Association boasts over 2,800 signatories that now have to submit climate impact reporting aligned with recommendations from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). (Over 480 investors representing US$ 42 trillion have already signed up to voluntary TCFD metrics). From 2020 those metrics are now required for all PRI signatories.

TCFD and PRI recommendations center on measuring the number of tons of carbon dioxide equivalent produced per million dollars of company revenue. This allows effective comparison.

[caption id="attachment_7607" align="alignnone" width="1024"]

Figure 2: Subset of metrics associated with the TCFD’s recommendations around climate related portfolio risk measures which focus on tons of carbon-dioxide equivalent per million dollars of revenue. Source: PRI Reporting Framework 2019 Strategy and Governance (Climate-related indicators only).[/caption]


Mercer’s 2019 Report “Investing in a Time of Climate Change” addresses many of the aspects of planning for different environmental scenarios of warming by three temperature increments over pre-industrial levels: +2oC, +3oC, and +4oC over different time frames ending in 2030, 2050, and 2100.

For example, if an investor is looking out to 2050, exposure to carbon-based fuels should be re-allocated as even in a modest +2oC scenario, virtually all coal-based emissions must be zero by 2040. While the coal sector’s outlook is quite startling, there are investment opportunities for those looking to build sustainability into existing investment strategies.

Action: Measuring carbon in a financial portfolio

Sustainalytics recently adopted a risk-based approach to ESG with a goal of establishing several key benefits to their carbon risk ratings: simplicity, reliability, comparability, flexibility, comprehensiveness and accessibility. Style Analytics added these modern carbon risk ratings into our ESG module.



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