IIGCC Offers Ratios to Track Portfolios’ Climate Impact

A new report by the Institutional Investors Group on Climate Change provides guidance to asset owners on closing the net zero investment gap.  

Asset owners should track their contributions to climate change mitigation by calculating the green investment ratio of portfolios and assets, according to a recent report by the Institutional Investors Group on Climate Change (IIGCC).

The IIGCC has estimated that over USD 126 trillion needs to be invested in climate solutions by 2050 in order to meet the goals of the Paris Agreement.

The European investor membership body has proposed a green investment ratio to help investors calculate the current percentage of their investments already bolstering climate solutions, so they can then identify the extent to which they need to raise their ambition to fulfil their net zero targets.

“Being able to connect the real world need with portfolio construction – and then measuring contributions – is crucial for investors,” said Stephanie Pfeifer, IIGCC’s CEO. “Failure to do so means investors may not contribute optimally towards meeting the current net zero pathway investment gap.”

The IIGCC has also identified ten key climate solutions that need to be upscaled by 2050 to limit global warming to 1.5°C.

“Comprehensive snapshot”  

The proposed green investment ratio “provides the most comprehensive snapshot of a portfolio’s exposure to climate solutions”, the report said, noting that it helps investors set targets, measure performance over time, and identify growth opportunities.

The metric also aligns with the EU’s Taxonomy Regulation, which will require asset managers falling under the Non-Financial Reporting Directive (soon to be replaced by the Corporate Sustainability Reporting Directive) to report the percentage of their investments that are taxonomy-aligned, the report added.

Under CSRD, asset managers will be required to report a green investment ratio for their EU-based investments from 1 January, 2024.

However, different climate solutions have varying levels of importance depending on the region, the IIGCC said, calling for the development of more regional and granular sustainable taxonomies to better inform investors’ green investment ratio calculations – and help identify sustainable investments – around the world.

Because the green investment ratio may not fully capture the “varied impact that taxonomy-aligned activities can have on emissions reductions”, investors can also use the priority net zero investment ratio, the report proposed. This measures the share of a portfolio’s total investments allocated towards climate solutions identified in the report as having a critical impact on achieving net zero emissions by 2050, including solar PV, hydrogen-based electricity, and grid-scale electricity storage.

The IIGCC has also proposed the green capex intensity alignment metric and the portfolio carbon return metric.

The former measures the alignment of a sector’s green capex intensity against a Paris-aligned benchmark, and the latter measures the emissions abated relative to total investments, thus helping investors quantify the relative impact of their investment decisions.

The IIGCC is working with global index, data and analytics provider FTSE Russell to explore the methodologies and options for applying these metrics into the listed equity market.

This follows the IIGCC Paris Aligned Investment Initiative’s (PAII) Net Zero Investment Framework (NZIF), which outlines the recommended scope, metrics and targets, and implementation actions investors can use when aligning their listed equity, corporate fixed income, sovereign bonds, real estate, and private equity assets with their net zero ambitions.

NGO FCLTGlobal also recently published a report offering investors guidance on adopting a top-down approach to decarbonising their long-term investments. It addresses six strategic elements, including preparing for a non-linear progress to net zero, and considering how externally managed assets will contribute to investors’ decarbonisation commitments and adjusting investment mandates accordingly.

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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