The aim of the Paris Agreement is to keep global temperature rise well below 2°C above pre-industrial levels by 2100, and pursue efforts to limit warming to 1.5°C. Although 195 parties to the United Nations Framework Convention on Climate Change (UNFCCC) reached consensus on the Agreement in 2015, recent data from the Climate Action Tracker shows that the world will still likely warm 2.7°C or higher by 2100, even if all governments achieve their pledges and targets.

A Call to Action for the Financial Market

The financial market needs to help facilitate an adequate flow of capital towards a low-carbon economy. To help investors track their portfolios and benchmarks against the goal of limiting global warming, we developed a transition pathway approach that examines the adequacy of a company’s emission reductions over time. Leveraging the Trucost Paris Alignment Dataset, users can evaluate a company’s current and forecasted carbon emissions and identify the scale of reductions required to meet the Paris Agreement goal. The approach helps identify industry leaders and laggards when it comes to decarbonization, and can be applied across a wide variety of portfolio holdings and aggregated to portfolio-level results. 

The dataset tracks a number of pathway metrics, including a company’s actual carbon intensity and its “aligned” carbon intensity, enabling uses to calculate the delta between the two — both today and over time. A positive delta indicates a company is more than on track to meet its share of the goal, while a negative delta indicates it is not on track.

To assess if there is any over/under performance within equities that exhibit positive/negative deltas, we ran a back test on the S&P 500 Index from May 2015 to August 2020. Findings showed that equites with the highest carbon intensity delta outperformed others. 

Using the Paris Alignment Dataset, investors can determine which companies and sectors are compatible/incompatible with the Paris Agreement goal and are better/worse positioned to withstand potential risks as a result of climate change. This will enable investors to craft portfolios that can help with the transition to a low-carbon economy. 

Click here to read the full report and learn more about this important dataset.

Check out other blogs in this series Financing Sustainable Development and Aligning Portfolios With The EU Taxonomy.

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