A group of experts established by Mark Carney, in his capacity as UN special envoy for climate and finance, has finalised best practice guidance on portfolio alignment metrics to support a new recommendation for investors from the Task Force on Climate-related Financial Disclosures (TCFD).
In connection with its latest annual status report, the TCFD today published an update to its 2017 implementation guidance, which now includes a recommendation that investors and lenders disclose the alignment of their activities with a well-below 2°C global warming scenario.
Accompanying the TCFD’s publications today is the final report from the Portfolio Alignment Team (PAT), which was established by Carney in 2020 to catalyse progress in the analysis and use of portfolio alignment metrics.
The report, the PAT said, “aims to foster convergence of approaches around 26 best practice recommendations, and increase the transparency of methodological choices”.
The PAT will now be disbanded and transfer its work to the Glasgow Financial Alliance for Net Zero (GFANZ), a major finance sector coalition representing over $90trn (€77.5trn) of assets across banks, investors and others.
“It’s a hugely exciting moment that this work is now being carried on within GFANZ,” said Edward Mason, director of engagement at Generation Investment Management and staff lead for the portfolio alignment workstream in GFANZ. “Portfolio alignment metrics are a really significant tool for investors as they pursue their net-zero goals.”
Mason’s colleague, David Blood, senior partner at Generation, was head of the PAT.
Softer on ITR
The final PAT report and TCFD recommendation incorporate some key changes in response to consultation feedback. The recommendation from the TCFD, for example, no longer states that investors should “incorporate forward-looking alignment metrics into their target-setting frameworks and management processes”.
Instead, it states that asset managers and asset owners should use “whichever approach or metrics best suit their organisational context or capabilities”.
In a similar vein, the PAT amended its recommendations regarding tool choice to ensure these did not suggest that all institutions move towards an implied temperature rise (ITR) metric in the long term.
ITRs are a relatively new tool and have been the subject of heated debate, although they are being used by organisations such as AXA and Japan’s Government Pension Investment Fund.
Pascal Christory, group CIO at AXA Group, said the metric enabled it to identify transition models and their impact on climate change, but that the ITR metric needed methodological convergence.
“That is why we support the TCFD-commissioned work on portfolio alignment tools, presented in the PAT’s report published today,” he said.
“It provides useful technical hints to help asset owners think how to measure investment-related climate neutrality, and will reduce the risks of greenwashing associated with loosely defined ITR models.”
Other changes made by PAT included adding a suggestion that investors use 1.5°C scenarios for their alignment activities, and that they follow Science-Based Targets initiative standards on scenario choice as minimum criteria.
TCFD updates for corporates
For its part, the TCFD today also released new guidance for companies to disclose their plans for a net-zero transition in line with the Paris Agreement, including disclosure of seven categories of cross-industry metrics like Scope 1, 2 and 3 greenhouse gas (GHG) emissions.
The TCFD is now saying that absolute Scope 1 and 2 GHG emissions should be disclosed regardless of materiality. It continues to encourage Scope 3 emission disclosures, but says this is subject to a materiality assessment.
“When you consider the disclosure around transition plans, a lot of that will capture Scope 3 emissions as well, so we think we’re narrowing the universe of companies that won’t also be disclosing Scope 3,” Mary Schapiro, head of the TCFD and vice chair for global public policy at Bloomberg L.P., told journalists yesterday.
Welcoming the TCFD publications today, the Financial Stability Board said the framework had become a widely supported basis for climate-related reporting, most recently through jurisdictional initaitives to make such disclosures mandatory or promote voluntary implementation, as well as through the IFRS Foundation’s work to develop a baseline global sustainability reporting standard.
”As the IFRS Foundation advances its work, there is an important continuing role for the TCFD in monitoring and reporting on take-up of its recommendations in the period until a global baseline standard is agreed and the implementation of that standard across jurisdictions begins to be monitored,” it said.
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