A group of 18 international investors with more than £2trn under management has launched a framework to help asset owners gauge how the transition to a low-carbon economy affects their investments.
The Transition Pathway Initiative (TPI) was launched today at an event held at the London Stock Exchange attended by the heads of the funds involved.
The initiative, spearheaded by asset owners the Church of England National Investing Bodies and the Environment Agency Pension Fund, is an online tool which seeks to help investors assess how well the companies they invest in are progressing towards a low-carbon economy – and how that transition could affect their portfolios.
It evaluates and tracks the quality of companies’ management of greenhouse gas emissions and the risks and opportunities related to the low-carbon transition by ranking them on a scale of 0 to 4 based on publicly available information provided by FTSE Russell.
At present, 40 UK listed companies have been assessed using this ‘management quality’ metric; the 20 largest by market capitalisation from the oil and gas sector, and 20 from the electrical utilities sector.
In the coming months, the framework will also assess how companies’ future carbon performance compares to the international targets and national pledges made as part of the Paris Agreement made last year, known under the framework as the ‘carbon performance’ measure.
TPI co-chair and head of engagement for the Church Commissioners and Church of England Pensions Board, Adam Matthews, described the TPI as “a tipping point for the market”.
He added: “The initiative will identify companies that are aligned with the transition to the low-carbon economy and those most exposed to climate transition risk. There can be no doubt about the seriousness with which asset owners are taking account of this risks and it will be a key feature in the discussions we will be having with companies over the coming years.”
Environment Agency chair, Emma Howard Boyd, said businesses should be able explain to investors how they plan to manage climate change risks and how they aim to invest and innovate on the way to the zero-carbon economy of the future.
“With the launch of the Transition Pathway Initiative, asset owners from around the world are sending a strong signal that portfolios will align in the future with companies that are taking the transition to a low carbon economy seriously,” she added.
Speaking at the event, Simon Dietz, a partner and co-director at the Grantham Research Institute at the London School of Economics, which is a partner for the TPI, said companies in the electrical utilities sector were generally further advanced in the transition process than those in the oil and gas sector, but there was room for improvement across the board.
He said 39 out of the 40 companies on the platform were seen to be ‘acknowledging’ the issue of carbon, but only seven were considered at a level of ‘strategic assessment’(level 4). Meanwhile, 15 were at level 2 which means they were ‘building capacity’. Only one company, Pioneer Natural Resources, was rated as 0, or ‘unaware/not acknowledging’ the issue.
The most common factors hindering progress, said Dietz, were not having set quantitative targets for reducing operational greenhouse gas emissions (26/40 have not), and not having had operational emissions data verified (22/40 have not).
Universities Superannuation Scheme head of equities Liz Fernando said climate change was one of the main risks to portfolios, adding the TPI would help the scheme assess how serious company management was on the issue of carbon and that “better decisions led to better returns for investors”.
Nadine Viel Lamare, head of sustainable value creation at Swedish pension fund Första AP-fonden (AP1), said sustainability was high on the scheme’s agenda and well-managed companies that were “fit for the future” would provide long-term sustainable returns.
She added: “This will help us identify companies that are at least working in the right direction. We will use this for our investment decisions, but also to engage with companies.”
