Blog - Planetrics expands its temperature alignment metrics

Planetrics expands its temperature alignment metrics

By Glendon Giam (Technical Economist) and Charlotte Lovegrove (Analyst)

As part of its most recent update of the PlanetView® climate risk platform, Planetrics has expanded the range of temperature alignment metrics that are available for users. The greater selection of temperature alignment metrics gives banks and financial institutions greater flexibility and choice in how they measure and report temperature alignment of their investments.

A temperature alignment score indicates the expected increase in global temperature that is implied by a company or portfolio’s greenhouse gas emissions. This is useful for evaluating the implied level of warming resulting from investment in a company or portfolio. Temperature scores are usually expressed as an expected °C increase in the global mean temperature by 2100.

Investors and other financial institutions are increasingly using temperature scores to assess their portfolio’s alignment with climate goals and to make decisions. For example, a temperature score of 3°C would indicate that a portfolio is not aligned with the Paris Agreement goal of limiting warming to less than 2°C and preferably 1.5°C. A financial institution may decide to limit exposure to counterparties with temperature scores above a certain temperature threshold as a way of managing its exposure to climate risk.

There is currently no standardized approach for calculating temperature scores. There are many different approaches available in the market, each leading to a different temperature score for the same company or portfolio. This means that there is a lack of consistency and comparability in measuring and reporting temperature alignment. The Taskforce for Climate-Related Financial Disclosures (TCFD) was created by the Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders. In 2021 they published their recommendations on how financial institutions should report climate-related metrics, including implied temperature rise 1.

Planetrics now offers an alternative method of calculating temperature scores based on the TCFD recommendations. The TCFD recommends that a company’s implied temperature rise score should be calculated based on their total cumulative greenhouse gas emissions during future decades. This directly reflects companies’ expected contribution to climate change, since it is cumulative emissions that drive climate change 2.

Planetrics implements this approach by comparing a company’s expected cumulative between today to 2050 with its ‘emissions budget’. A company that emits more than its carbon budget contributes to additional warming and will thus have a higher temperature score. Planetrics refers to this as the ‘Budget temperature score’.

A company’s carbon budget is determined by allocating it a portion of the global emissions budget under a scenario that limits temperature increases to less than 2°C 3. Companies in low-emitting sectors such as Technology have a smaller carbon budget to reflect their lesser contribution to warming, whereas companies in highly emitting sectors that are difficult to decarbonise have larger carbon budgets. The carbon budget of a portfolio is equal to the combined carbon budget of all its companies, after adjusting for the portfolio’s ownership share in each company.

This new temperature score is available for all companies in the Planetrics universe (over 20,000 listed companies). The model projects emissions for all companies, taking into account their current emissions rates and projected future growth. Planetrics has also collected data on the emission reduction targets of several hundred companies that are highly exposed to climate risk. Users can view the impact of a company’s targets on its temperature score, helping them better assess the ambition of companies’ climate goals.

Planetrics offers the ‘Budget temperature score’ as an option in addition to the ‘Pathway temperature score’ already available on the PlanetView platform. The Pathway method measures point-in-time company emissions intensity in 2050 against a sector-region temperature warming relationship, alongside downstream Scope 3 and avoided emissions.

To find out more about Planetrics’ approaches for measuring temperature alignment for companies or portfolios, please contact Tommi Oksanen at tommi.oksanen@planetrics.com

Footnotes

1) ‘Measuring Portfolio Alignment: Technical Supplement’ (TCFD) https://ccli.ubc.ca/wp-content/uploads/2021/09/2021-TCFD-Portfolio_Alignment_Technical_Supplement.pdf

2) It is estimated that every 1,000 Gt of CO2 emissions is estimated to increase global average temperatures by approximately 0.45°C (IPCC, 2021: Climate Change 2021: The Physical Science Basis: Summary for Policymakers, pp. SPM-37). https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_Full_Report.pdf

3) The NGFS Below 2C scenario from the 2021 NGFS scenario sethttps://www.ngfs.net/sites/default/files/media/2021/08/27/ngfs_climate_scenarios_phase2_june2021.pdf

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