A shared language for climate investing
Assigning temperature scenarios to companies and portfolios puts them under an entirely new light and puts pressure on the broader reputation of companies and fund managers.
Now, if they exceed their carbon budgets and are heading towards 3°C or 4°C or 5°C warming – and examples unfortunately abound – there’s no hiding. Market conventions may evolve to where companies not aligned with the 1.5°C-2°C temperature range, or at least not taking steps to rectify the course, are named, shamed and potentially even penalised by regulators.
Temperature – A new standard market data point?
Disclosure framework for climate-related data
Global, standardised self-disclosure platform
Detailed carbon disclosure framework covering governance, strategy, risk management and targets
Like the “IFRS” or annual report of climate
Linking decarbonisation pathways with warming targets based on the latest climate science
Companies or indices can be assigned a temperature scenario
And because institutional investors, such as pension funds and insurance companies, manage funds in relation to benchmarks (potentially including EU CTBs and PABs soon), they could be required to associatetheir portfolio with a temperature scenario.
Some actively-engaged companies and investors are ahead of the curve and have already started publishing the temperature scenarios associated with their portfolios, including the Japanese Government Pension Investment Fund (GPIF).
Let’s take a closer look at how target setting looks in practice. Tesco is a British international grocery and general merchandising retail chain with more than 6,000 outlets across Europe and Asia.
Sector
Country
Target temperature scenario
SBT commitment date
Description of targets
Food and Staples Retailing
United Kingdom
1.5°C
June 2017
Reduce Scope 1 and 2 GHG emissions by 60% by 2025 from a 2015 base year
Reduce Scope 3 GHG emissions by 17% by 2030 from a 2015 base year*
Tesco set its first business-wide decarbonisation targets in 2006, and has a long-standing ambition to achieve net-zero emissions by 2050. Following the Paris Agreement, Tesco reviewed its 1.5°C alignment efforts and, with the help of SBTs, realised that it needed to ramp up its short to medium-term absolute reduction targets.
Having invested over £700 million in energy and refrigeration efficiency improvements since 2006, the company has managed to lower emissions from stores and distribution centres by 41% per square foot, and even deliver on absolute reductions against its 2006 baseline despite significant floor area growth.
Read more examples in the full guide
Regulation and industry best practice is moving towards ‘temperature scenarios’ as the shared language of climate action.
Several major companies have already committed to Science Based Targets that use specific temperature goals to build their decarbonisation trajectories.
Some investors are taking on more risk than they realise, by assuming ‘business as usual’ for high-impact carbon emitters.