Temperature scores: an innovative tool for ESG fundamental investors

April 13, 2021

2021 will be a pivotal year to curb climate change. Although global CO2 emissions dropped 7% in 2020 due to the effects of Covid-19-related lockdowns, stronger action will be needed at the upcoming Conference of the Parties (COP) 26 to keep temperature increases below 2°C and towards 1.5°C.1 Achieving the 1.5°C goal will require net zero global emissions by 2050. Today, the financial sector has new tools to measure the alignment of investment portfolios with the goal of net zero global emissions by 2050. Among these are temperature scores. To compute the temperature of company x, one compares the future emissions trajectory of that company with the corresponding trajectory of its sector, as deemed by the International Energy Agency (IEA) in alignment with a world where the temperature rise is limited to 1.5°C. So far, these scores have been adopted by only a handful of investors. A significant amount of work is still needed for investors to efficiently use such scores in their strategies. The aim of this paper is to present an overview of temperature scores across equity and credit universes. This paper builds on prior research on the distribution of temperature scores across different investment universes, using the methodologies of three data providers: CDP (Carbon Disclosure Project), Iceberg Data Lab, and Trucost. These are our key takeaways:

  • Across providers, very few companies have a temperature score below 2°C.
  • Our analysis of temperature distributions finds unevenness across geographies, with US equity being the worst performer, followed by emerging markets (EM) and European equity.
  • Sector-based analysis shows large temperature discrepancies among industries.
  • Techniques to compute temperature metrics are under development and could evolve as data providers improve their methodologies.
  • Focusing on the distribution of temperature scores rather than on the score of an aggregated portfolio could be an efficient way for investors to use these metrics.

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