Asset Managers – Climate
Climate Policy
Objective
Objectives
Methodologies have been developed to assess the compatibility of a loan portfolio with environmental objectives such as the Paris Agreement. Numerous methodologies exist, with different approaches and different reference scenarios, and there is currently no scientific or regulatory consensus to favor one over the other. Calculating the alignment of a loan portfolio makes it possible to assess whether the activities financed are following a pace of transformation, of decarbonization, in relation to a reference scenario. Calculating the carbon intensity of a portfolio makes it possible to relate its CO₂ emissions to its size. The scientific and expert committee has issued recommendations for the proper definition of an alignment strategy.
Climate policy
A management company may choose to include climate indicators in its responsible investment policy. The two main indicators used to measure the impact of investment decisions are carbon intensity or footprint and implied temperature calculations.
Participation in Net Zero alliances
The ‘Net Zero Asset Managers initiative’ is a program launched in December 2019 as part of the United Nations Environment Programme Finance Initiative (UNEP-FI). By joining the alliance, signatory asset managers commit to aligning their investments and portfolios with net zero emissions targets by 2050.
Target tracking
A number of metrics can be used to track the progress of players in relation to the commitments they have made.
Carbon footprint and intensity
The carbon footprint corresponds to the carbon emissions generated directly or indirectly by an entity. Generally it is expressed in CO₂ equivalent, i.e. it presents the emissions of all the entity’s greenhouse gases expressed in CO₂. These emissions can be divided into 3 scopes.
- Scope 1 corresponds to direct emissions.
- Scope 2 corresponds to indirect emissions linked to energy consumption.
- Scope 3 groups together other indirect emissions. For financial institutions in particular, it is important to divide Scope 3 into two parts.
- The first corresponds to the indirect operational emissions of financial institutions (waste emissions, employee travel, etc.). In the GHG protocol, this corresponds to scope 3.1 through to 3.14.
- The second part corresponds to indirect financed emissions. This involves calculating the scope 1, 2 and 3 of the companies financed by the financial institution up to the level of the share it finances. In the GHG protocol, this corresponds to scope 3.15.
Most of the emissions generated by a financial institution correspond to its financed indirect emissions. This metric is used in particular to measure the objective of contributing to carbon neutrality. As a reminder, carbon neutrality can only be used at the global level; at the level of financial institutions and companies in general, we speak of contribution to carbon neutrality, as ADEME emphasizes in its March 2021 note.In order to monitor this contribution, the institution must calculate its carbon footprint on the one hand, and its carbon offset on the other, corresponding to the carbon sinks it will generate to compensate for greenhouse gas emissions. Carbon intensity means presenting carbon emission calculations in relation to the entity’s production. Depending on the methodology used, some institutions or associations present this figure as the carbon footprint per euro invested, taking as the denominator the money injected by the financial institution into the economy (through loans, investments and property holdings).
Avoided emissions
An organization’s emissions reductions achieved by its activities, products and/or services are referred to as ‘avoided emissions’, when these reductions are achieved outside its scope of activity. In recent years, more and more companies have been claiming avoided emissions to underline their participation in the global decarbonization effort. Read the explanatory note from ACT, the Finance ClimAct project, on this subject.
Default temperature
Temperature calculations are based on carbon emission calculations and on the climate strategies of financial institutions, which enable us to define an entity’s climate performance. One or more climate scenarios are then defined. Climate performance is then compared with these scenarios to give the temperature of the portfolio. These calculations can be performed for the entire portfolio or by sector.
Climate financing
Bonds
Bonds are loans issued by companies on the financial markets. Extra-financial conditions can be attached to bonds at the time of issue. This enables investors to choose to support companies and projects according to defined criteria, such as environmental or social criteria.
Labels
Labeling a fund enables a player to certify the management process and the selection of issuers in its portfolio according to the various criteria required by each label. Labeling a fund guarantees compliance with the specifications specific to each label, and reassures customers in their selection of responsible products. Labeling a fund guarantees that it complies with the specifications specific to each label, and reassures customers in their selection of responsible products. The Greenfin label makes it possible to invest in funds that respect environmental criteria. One of the special features of the Greenfin label is that it excludes funds investing in fossil fuels or nuclear power.