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Understanding decarbonisation pathways for finance

© Shutterstock / ScharfsinnDecarbonisation traffic light

The publication of Achieving the Paris Climate Agreement Goals Part 2’ Science-based Target Setting for the Finance industry identifies the nuts and bolts of decarbonisation targets on a scientific basis.

An open access book ‘Achieving the Paris Climate Agreement Goals Part 2’ Science-based Target Setting for the Finance industry supports the United Nations Principles for Responsible Investment initiative (UNPRI).

Although voluntary, the finance community is increasingly signing up to initiatives that commit them to science based targets – this book will help them achieve them.

Book discusses and proposes methodologies

The book discusses and proposes methodologies that classify measurement techniques, although the definitions and boundaries of Scope 3 emissions remain to be settled.

Many initiatives have been set up from the UN Principles of Responsible Investment (UN-PRI, the Net Zero Asset Managers Initiative (NZAMI), the UN-convened Net Zero Asset Owners Alliance (NZAOA) and more. While initiatives showing such commitment to action on emissions, historically there has been concern that such initiatives offer opportunities to fossil fuel investors to look committed while doing little.

The UN-PRI has more than 4,300 signatories, managing over $121 trillion assets under management (AUM.) Signatories are expected to transition their portfolios to net zero by 2050.  Following pressure to increase the robustness of its approach, today to be credible signatories must have intermediate targets, established for 5-year intervals and regular reporting on progress.

The Net Zero Asset Managers Initiative (NZAMI) is another such body, with $61 trillion AUM. While this is half the amount under the PRI it is still equivalent to the combined GDP of the US, EU, China, Japan and the UK.

July 2022 saw analysis from Morningstar of the NZAMI’s progress report however, which assessed the performance of signatories. The AUM committed to net zero varied from 4-100% of the portfolio but only nine managers committed 100% of their assets to net-zero and 15 committed less than 50%.

Asset manager find it hard to implement portfolio targets

While investor groups focused on stewardship and engagement, such as the Climate Action 100+ or the Institutional Investors Group on Climate Change (IIGCC) have proved fairly successful. Part of the challenge that asset managers face is that they can feel less equipped to commit to portfolio targets because corporate disclosure and company-level emissions data remains weak and often inconsistent, while at the same time portfolio-level commitments can be conditional on clients’ ambitions.

The lack of portfolio alignment metrics (PAMs) is also a challenge, and the GRI has just launched a consultation to develop best practice in aligning investment portfolios with net zero goals.

Research addresses doubling counting in industry

Author Sven Teske at the Institute for Sustainable Futures (ISF) at the University of Technology Sydney (UTS) was commissioned by the PRI Alliance to develop 1.5 °C decarbonisation pathways for key high-emitting sectors, on a global level, to achieve net-zero emissions by 2050.

In collaboration with other researchers, he explored the statistical basis of decarbonisation pathways for individual industry sectors that form the ‘climate stress tests’ for investment portfolios.

The work develops from the OneEarth Climate Model (OECM), the integrated assessment model for climate and energy pathways that focuses on 1.5 °C scenarios. It addresses one of the particular challenges in exploring decarbonisation pathways and that is the issue of double counting emissions.

It draws out the categorisations of the Global Industry Classification Standard (GICS) on which the pathways for the industry and service sectors are based, merged with the statistical data of the International Energy Agency (IEA).

Methodology proposed reduced data and simplifies reporting

The new definitions of Scope 1, 2, and 3 emissions for the OECM are looked at with an explanation of how the systemic error of double counting in the original procedure can now be avoided. There is less clarity about Scope 3 emissions and that will remain a challenge as they tend to represent most of an organization’s total GHG emissions with an average figure from CDP suggesting around 75%.

The report states: “Double counting can be avoided by defining a primary class for the primary energy industry, a secondary class for the supply utilities, and an end-use class for all the economic activities that use the energy from the primary- and secondary- class companies. The separation of all emissions by the defined industry categories—such as GICS—also streamlines the accounting and reporting systems.

The volume of data required is reduced, and reporting is considerably simplified under the OECM methodology.

For a specific industry sector to achieve the global targets of a 1.5 °C temperature increase and net-zero emissions by 2050 under the Paris Agreement requires that all its business activities are with other sectors that are also committed to a 1.5 °C and net-zero emission targets.

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