Stockholm (NordSIP) -Given the evolving climate reporting landscape and the wide and complex range of metrics available to investors, environmental disclosures remain a topic of heated debate. In a new report, AP4 and Invesco review the current landscape and explore the risks and opportunities associated with temperature alignment for investors. The project focuses on two key climate metrics, and compares Carbon Budget Divergence (CBD) and Implied Temperature Rise (ITR) as essential tools for assessing portfolio alignment with climate goals.
“We are delighted to work together with AP4 on this important report, which is a testament to our ambition to share sustainable investment insights widely. It has allowed us to combine our expertise and resources to deliver a practical and very topical guide for climateconscious investors in relation to forward looking carbon metrics,” Daniel Eskilsson, Senior Sales Manager at Invesco, adds.
The report was authored by six experts from AP4 and Invesco: Pontus Lidbrink, Head of Systematic Equities at AP4; Julia Ripa, Senior Analyst Systematic Equities at AP4; Conor Hartnett, ESG Client Strategies Manager at Invesco; Tim Herzig, Invesco Quantitative Strategies; Sebastian Lehner, Portfolio Management Associate at Invesco; and James Sieyes, ESG Analyst at Invesco.
“There is a lack of guidance and knowledge on how to address temperature alignment in portfolios. This report therefore acts as a tool for investors to navigate different types of data sets and how the choice of measurement method affects the portfolio’s alignment with the Paris Agreement,” says AP4’s Ripa.
Report Highlights
This report provides valuable insights for investors seeking to optimise and safeguard their portfolios in the context of climate change. The document outlines different approaches to identifying paths towards carbon neutrality and specifically highlights the potential impact of integrating climate alignment in portfolio construction.
AP4 and Invesco highlight three main takeaways regarding CBD and ITR. First, the co-authors argue that the insights from the report have practical applications, noting that CBD is useful for detailed issuer-level analysis focusing on materiality by considering absolute deviations from an assigned carbon budget. Moreover, ITR can be used for high-level communication and focusses on the relative over- or undershoot.
Second, the report also notes that sectoral analysis can vary substantially, given the nature of the relevant economic activity. “Dirty” sectors like Energy, Utilities and Materials typically
score worse on average than other sectors. Analyses should bear in mind this variability when considering the result of CBD and ITR measurements .
Lastly, the report notes that a reduction in both ITR and carbon budget overshoot will impact portfolio optimization, which means investors will need to accept a somewhat higher tracking error although the report notes that climate impact reduction appears to requires the addition of only a small level of active risk.
