Climate Change Metrics for Investors Aiming for a Green Portfolios
Through accurate metrics, investors could determine which sector has the same target in achieving “net zero” emission.
From 2016 to 2018, climate change-related weather disasters cost $630 billion in losses globally. It implies that climate change is one of the financial risks that need to be addressed.
This momentum became a wake-up alarm for companies and governments to reduce carbon emission or decarbonization. The goal is to minimize the possible risk caused by climate change. One of the options with a promising return is through sustainable investment.
Climate Change Metrics for Investors
Slowly but sure, business and sustainable investment has become the main issue. The commitment is in 2050, the emission has reached “net zero” which not adding new emissions to the atmosphere. The absorbed CO2 must be equivalent to the amount produced.
Hence, investors need to know the metrics when they are interested to arrange sustainable investment. By defining the climate change metrics, the chance to acquire a successful decarbonization economy would be more obvious.
Specifically, there are at least 5 metrics to be considered:
- Carbon Emissions
The measurement is executed during point-in-time to determine absolute carbon emission produced by the company’s direct and indirect activities
- Carbon Intensity
The measurement of emission efficiency through the revenue of the companies. By applying this metric, the emission across companies of different sizes could be examined.
- Emissions Reduction Target
Indicator of the company’s objectives to reduce their carbon emissions. It’s evaluated from the quality, extent, and also plans related to the target
- Carbon Earnings at Risk
Estimated present value related to future earnings loss. It’s counted based on the projection from the company’s current emissions and price path of carbon.
- Climate Change Revenues
Percentage of the company’s earnings related to both negative and positive climate impacts. The score is based on underlying services and products tied to climate change.
It’s impossible for asset owners or investors to be involved in decarbonization without considering these 5 metrics. It’s crucial to assure the process and outcome match the expectation.Moreover, these metrics could help in developing an adequate framework to perform their decarbonization agenda. This is the starting point where the investors could select which sector has a similar value toward “net-zero” emissions.
Steps Toward Green Portfolio
For investors, the initial step to do decarbonization is by acknowledging how much emissions created by the listed companies. From this point, then the average emission could be drawn.
Next, the investor could utilize the data as guidance on how to achieve a “net-zero” portfolio within a certain period.
Certainly, the global economy means the companies wouldn’t be on the equivalent level toward decarbonization. Also, the result won’t be seen instantly. Some could do it quickly, some others don’t. Count all the factors, including the eco-friendly waste collection.
During the process that might take years to develop, most investors must adjust dynamically to any modification. The decision of which companies to invest in is crucial to mitigate the risk.
Whenever the climate change metrics are handled well, the investor could decide which company and sector contribute to reducing the emission.
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References:
5 Climate Change Metrics for Investors in a Decarbonizing World. https://www.morganstanley.com/ideas/climate-change-investing-decarbonization-metrics
Carbon Pricing Dashboard. https://carbonpricingdashboard.worldbank.org/what-carbon-pricing#:~:text=For%20the%20power%20sector%2C%20the,decarbonize%20the%20sector%20by%202050
Climate Transition in a Portfolio Context: What Matters and What to Measure. https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/Climate_Transition_in_a_Portfolio_Context_070120.pdf
Author: Azelia Trifiana
