Lombard Odier challenges TPI, 2DII responses to TCFD metrics consult

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The nature of implied temperature rise (ITR) metrics has been misrepresented by a response to a Task Force on Climate-related Financial Disclosures (TCFD) consultation from supporters of the Transition Pathway Initiative (TPI), Lombard Odier has claimed.

In an open letter* to the TCFD and the affiliated Portfolio Alignment Team, the asset manager also challenged feedback to the consultation from think tank 2° Investing Initiative (2DII), the lead developer of the Paris Agreement Capital Transition Assessment (PACTA) methodology.

Lombard Odier said it appreciated the TPI’s and 2DII’s efforts and agreed there remained room for further improvement of ITR metrics.

However, it said the authors of the organisations’ responses argued against the adoption of ITR metrics “in defence of their own approaches” and that it believed the responses “risk misrepresenting the nature of ITR metrics and confusing market participants”.

Publicised last month, the TPI-linked response was sent by its steering committee and signed by its chair, Adam Matthews of the Church of England Pensions Board, four other representatives of steering group members, and three asset owner supporters or members.

The investors raised several concerns, stating that their most fundamental one was that the TCFD’s proposals would drive decisions that could undermine wider efforts to transition to a low carbon economy.

They wrote: “[I]t would become increasingly difficult to hold a portfolio of transitioning assets in high carbon intensive sectors, even if those very same companies had been responsive to investor engagement and made credible and independently verified net-zero aligned targets that were consistent with the transition.”

Lombard Odier, which has developed a temperature alignment metric closely aligned with the TCFD recommendations, said it believed the above cited statement from the TPI investors’ letter was an “incorrect representation of the nature, construction and objective of ITR metrics”.

High-emitting sectors are not penalised by ITR metrics, Lombard Odier said, saying they worked by first defining sector-specific benchmarks detailing the specific rate of decarbonisation that companies in the sector need to achieve, before comparing a company’s own historical and projected emissions to that benchmark.

“Well-designed” ITR metrics would compare a steel company against a benchmark specific to the steel industry, the asset manager said.

Lombard Odier also said it disagreed with the assessment in the TPI investors’ letter that the adoption of portfolio alignment metrics would potentially force asset owners to breach fiduciary duties.

In the conclusion of the asset manager’s letter, the Lombard Odier authors indicated they agreed that different approaches to the forward-looking assessments in question could lead to divergent results, but said that ITR metrics were ”an essential part of the carbon expertise required in the market”.

“We therefore look forward to the final version of the PAT report and encourage market participants to embrace it wholeheartedly, while continuing to pursue further innovations from this common reference point,” they wrote.

Contacted by IPE today, a spokesperson for TPI said it was not in a position to make any reactive comments on the letter from Lombard Odier. On LinkedIn, Jakob Thomä, director at 2DII Deutschland, said he was grateful to Lombard Odier for challenging the think tank’s response.

“While we may not agree on everything (and potentially disagree on quite a bit), finding the right way forward for sustainable finance requires engaging with each other’s ideas,” he added. “We wouldn’t be doing our job as a think tank if we didn’t critically engage with this type of feedback and challenge our own thinking.”

The TPI response analysed by Lombard Odier can be found here, and 2DII’s report on portfolio alignment metrics here. Lombard Odier’s letter can be found here.

*The Lombard Odier letter is signed by Thomas Hohne-Sparborth, senior sustainability analyst; Michael Urban, senior sustainability analyst; and Christopher Kaminker, head of sustainable investment, research, stewardship and strategy.