Skip to main content

Developing Sustainable Energy Investment (SEI) metrics, benchmarks, and assessment tools for the financial sector

Periodic Reporting for period 1 - SEI Metrics (Developing Sustainable Energy Investment (SEI) metrics, benchmarks, and assessment tools for the financial sector)

Reporting period: 2015-03-01 to 2016-08-31

The SEI Metrics research project aims to develop a climate performance framework and associated investment products that measure the exposure of financial portfolios to the new climate economy. The metrics, benchmarks, and tools will enable investors to align their portfolio with energy-technology roadmaps, such as those published by International Energy Agency (IEA) in the annual World Energy Outlook. Key outputs of the project include 2° investing criteria and benchmarks for financial assets and portfolios. The project runs from March 2015 to March 2018 and mobilises over €2.5m in funding, notably from the European Commission Horizon 2020 program. By working across the entire sector from corporates to asset owners, as well as involving policy makers, the SEI Metrics project will impact trends in capital allocation and ensure optimal exposure of financial institutions to the transition to a low-carbon economy. The project will enable:

• Asset managers to develop 2° investing funds and develop green marketing strategies;
• Index providers to develop diversified 2° investing benchmark indices for long-term investors;
• Asset owners and banks to set quantifiable progress targets on climate performance and assess the exposure of their portfolios to energy transition scenarios;
• Public authorities to integrate climate performance metrics into disclosure requirements and finance sector incentives.
The following summarizes the work completed in each work package and the main results achieved so far:

WP1:

Cired completed a report extending existing energy-technology and investment roadmaps, creating a range of scenarios that can be used by financial institutions to set targets. These scenarios are now being integrated into a portfolio assessment tool. In parallel, 2° Investing Initiative in partnership with the Frankfurt School has been working on a framework to translate energy-technology and investment roadmaps into financing roadmaps that can help inform on the role of the financial sector in financing the transition to a low-carbon economy.

WP2:

2ii led the development of corporate 2°C alignment methodologies assessing 2°C alignment across 10 key sectors. The methodologies have been road-tested and discussed with over 10 companies in partnership with the CDP / ADEME-led Assessing Carbon Transition (ACT) project. University of Zurich is currently exploring avenues to measure the exposure of companies to physical assets through their subsidiary network. In parallel to the work of corporate methodologies, a paper on measuring the climate-friendliness of sovereign bonds has been completed by 2° investing Initiative and Beyond Ratings. Climate Bonds Initiative has been working on real estate as a separate asset class.

WP3:

2ii has led the development of a portfolio assessment tool involving a software and a range of 2°C benchmarks for corporate bonds and listed equity portfolio – on the basis of the sector methodologies developed in WP2. The tool was launched in December 2015 with over 100 investors road-testing the tool to date. Over 90% of surveyed investors (~25) have said they were likely or very likely to use the tool to inform investment decisions, mandate design, and / or shareholder engagement.

WP4:

CDP has drafted two papers on the future of climate disclosure, focusing on technology linking databases (XBRL) and pitfalls of climate-related disclosure. 2° Investing Initiative has published a paper together with UNEP-Fi and GHG Protocol landscaping climate metrics in financial markets for investors. Outreach with data providers in turn has led 6 data providers (South Pole Group, Trucost, S&P, Sustainalytics, ET Index, Grizzly RI) to advertise the 2°C alignment tool developed in the SEI metrics projects to their clients as part of their services. In order to extend assessment frameworks with higher quality data, 2ii has partnered with EY to develop forward-looking ‘committed emissions’ databases for a range of key sectors.

WP5

2ii launched a working group with 5 index providers (MSCI, FTSE, S&P Dow Jones Indices, Solactive, Euronext) in the summer of 2015 to inform the requirements of index design related to 2°C benchmarks. One index provider (Euronext) used the methodology to ‘sanity test’ the index they build in the run-up to COP21. S&P in partnership with Trucost, has integrated parts of the 2°C assessment framework into their “Green Portfolio Analytics” tool.

WP6

2ii published a range of policy notes and working papers, as well as consultations, as part of the project, designed to support policymakers awareness of the SEI metrics project and associated financial policy options. The French Law on mandatory climate disclosure integrates the SEI metrics logic of 2°C alignment. A range of policymakers and regulators are looking at using the framework for internal assessment and / or as part of policy guidance. In partnership with WWF EPO, outreach has been coordinated to support EU institutions on the topic.
The project represents the first attempt to develop science-based indicators measuring the alignment of financial markets and portfolios - as well as securities - with climate goals. The key features of the work are fundamentally changing the way climate is assessed in financial markets. The project introduces a range of technical novelties that improves the transparency around the alignment of financial markets with climate goals and the materiality of climate-related metrics for investment decisions. it also helps to drastically reduce the cost and ease of access for investors to these types of assessment frameworks and thus facilitates disclosure frameworks with marginal reporting burdens. Key features relative to the state of the art include a pivot from backward-looking to forward-looking indicators, a science-based benchmark related to the 2°C climate goal rather than a comparison with the 'market', a detailed sector and geography specific benchmark rather than global, cross-sector assessments, sector-specific, geolocational databases, and the capacity to bulk test portfolios. It also represents the only open-source model and framework in the market, avoiding competitive biases in standard-setting. The model can be used by investors to align their portfolios with climate goals across a range of key technologies and fuels. Alignment can lead to impact through the signalling of financial markets via asset allocation decisions to companies regarding the need to set and contribute to 2°C aligned decarbonisation, the actual provision of capital to finance the transition, and shareholder engagement influencing companies investment decision-making directly. This market-led initiative can be complemented by policy frameworks that involve voluntary or mandatory reporting frameworks linked to the 2°C target and benchmarks, financial supervisory activities at micro or macroprudential level considering 'capital misallocation' vis-a-vis the climate objective and associated financial risk, as well as a broader suite of financial policy options. The frameworks can also help economic and climate policymakers gain an understanding on the extent to which financial markets are integrating policy signals into investment decisions.
picture1.png