Ethos Foundation, an organisation backed by Swiss pension funds, has devised a new approach to gauge how credible plans of listed companies to transition to net zero are, and start engaging with the biggest polluters.
The new methodology – Ethos climate transition ratings – assigns a temperature score to companies by linking their performance with rising temperatures, challenging the companies in terms of their climate goals and, in this sense, impacting the foundation’s engagement activities.
“Our goal is to engage with this methodology the biggest CO2 emitters, either companies scoring highest temperatures and contributing to global warming, or companies with low credibility,” Ethos chief executive officer Vincent Kaufmann told IPE.
Ethos plans to set up a new engagement campaign centered on the highest emitters, that are in the foundation’s investment funds and in the portfolios of pension funds, he said.
To measure companies’ trajectories to net zero, the temperature score combines the amount of CO2-equivalent (CO2e) emitted at the global level during the period 2010-50, so-called carbon budget, with the firms’ adjusted emissions.
Estimated adjusted emissions below the carbon budget mean that the temperature score of a company will be lower than the 1.5°C reference for global warming.
“It is very important for us to have our own way [methodology] to assess where companies are going in terms of climate change. We have decided to introduce the credibility factor to assess whether companies do everything they can to reach their net-zero ambitions,” the CEO explained.
He added: “As an investor, you normally look at the carbon footprint, which is backward looking, so you don’t take into consideration forward-looking aspects. Therefore, we thought it was important to have another metrics to assess the companies than only carbon intensity.”
The forecast relating to the emissions of a company depends on three main scenarios: one where firms continue their business-as-usual operations without reduction targets, another with firms meeting their targets, and a third where adjusted emissions based on Ethos’s climate credibility score are considered, taking into account only the credible share of the reduction, according to the new metric.
This leads to the credibility score on the realistic achievement of the companies’ climate targets, based on past and ongoing objectives, ACT (Assessing low-Carbon Transition) rating, if available, and the use of carbon sinks, it added.
“We are also using the ACT assessment framework, an initiative from the French government and the CDP, to assess climate plans. The methodology will also be useful for the say on climate votes at general meetings to define our voting positions,” Kaufmann added.
Companies adjusted emissions are calculated taking into account historical data, and disclosed targets and Ethos’s climate credibility score giving an idea of the share of targets that the companies meet.
Companies are classified according to sectors, with decarbonisation pathways that are more challenging in some industries than others with lower emissions per revenues generated. Companies generating revenues with oil and gas, electric utilities automobile manufactures, and steel and cement firms are among those classified as high-emission industries.
For high-emission sectors, the methodology uses the work of the Transition Pathway Initiative (TPI) to obtain sectoral carbon budgets, Ethos said.
The foundation has designed the latest metrics considering that existing methodologies take net-zero targets of companies almost for granted, without really challenging them.
The climate transition ratings can give institutional investors and pension funds a tool to assess whether and to what extent a company contributes to climate change, and is affected by it (dual materiality), and to measure the alignment of the portfolios to climate goals.
“We will propose to pension funds that are our members to measure the temperature of their portfolios to see how their investments are impacting climate, a requirement also of the (Swiss pension fund association) ASIP reporting framework issued in December,” Kaufmann said.
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