A new way of assessing corporate climate targets designed to help investors better identify transition risk in their assets and portfolios has been introduced by the Institutional Investors Group on Climate Change (IIGCC).

The Cumulative Benchmark Divergence (CBD) measures the difference between the decarbonisation trajectory implied by a company’s emissions target and a climate benchmark over the whole pathway. According to the IIGCC, this cumulative perspective better aligns with the way that emissions impact the climate.

“Over 2019 to 2050, a company which delays emissions reductions until 2049 and then reduces by 100% will emit two and a half times the amount of carbon of a company decarbonising by 7% annually,” said Dan Gardiner, IIGCC head of transition research.

In addition, the IIGCC said it believes the methodology could be applied beyond company targets to other asset classes in future, such as real estate or sovereign debt.

How does it work?

CBD compares the cumulative decarbonisation performance of a corporate, or real asset, over a defined period of time against a Paris-aligned benchmark.

The approach compares a company emissions target to the relevant climate benchmark across the whole pathway. The outcome is then expressed in a single percentage figure, indicating the degree of alignment (or misalignment) between the two. Effectively showing the ‘gap’ between the company emissions pathway and the climate benchmark.

By comparison, assessments of targets at discrete points in time do not capture cumulative emissions, which determines climate change, according to the report.

As such, the IIGCC said it hopes it can address some of the weaknesses associated with current methodologies and provide a credible basis for investors to assess climate alignment.

However, whilst it has advantages over existing approaches, CBD should not be used in isolation to assess asset-level transition risk, the report noted.

“Investors wishing to understand the alignment of a corporate with climate objectives should not take corporate carbon targets at face value or in isolation, but instead assess a broad range of criteria,” Gardiner added.

The group’s initial analysis highlights that portfolio results are particularly sensitive to the scores of companies representing the largest share of owned emissions.

What next?

For Gardiner, there is good reason to be optimistic about the potential of CBD. Adding that it fundamentally improves the assessment of company emissions targets and hopes that investors will use it to inform asset allocation and engagement activities, such as Climate Action 100+ and the new Net Zero Engagement Initiative.

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