Weekly round-up- July 18-22

Weekly round-up: July 18-22

July 22, 2022

The top five climate risk stories this week

1) OS-Climate unveils risk and investing tools

A climate data initiative backed by Amazon, Microsoft, Goldman Sachs, and other major corporations on Wednesday debuted three new tools to help financial institutions facilitate the net-zero transition.

OS-Climate, a non-profit set up by open source technology group the Linux Foundation, wants banks, insurers, software firms, academics and others to use the tools to build out what it calls a “public utility of climate data and analytics.”

“These tools will generate the refined data and actionable insights needed for pension funds, asset managers, and banks to rapidly align their investments and loans to net zero and resilience goals,” said Truman Seamans, the CEO of OS-Climate.

The “Physical Risk & Resilience Tool”, development of which was spearheaded by French bank BNP Paribas, can gauge the hardiness of assets to extreme climate events. 

The “Climate Portfolio Alignment Tool”, which was overseen by German insurer Allianz and Ortec Finance, helps financial institutions align their investments and loans with the 1.5°C temperature goal enshrined in the Paris Agreement.

Finally, the “Transitional Analysis Tool”, developed by Airbus, can help firms run climate scenario analyses to inform investment decision making. 

The code behind all three tools is publicly accessible, in line with OS-Climate’s mission to build a utility that is transparent, collaborative, and inclusive.

2) UK Sustainable Finance Lab to launch

new research hub for sustainable finance set up by the University of Oxford and the UK’s Financial Conduct Authority (FCA) will open later this year, with the aim of bringing together researchers, financial institutions, regulatory authorities and other stakeholders to test and scale climate finance innovations.

Announced Wednesday, the Oxford Sustainable Finance Lab intends to be a “safe space” for research and knowledge sharing on sustainable finance, said Dr Ben Caldecott, Director of the Oxford Sustainable Finance Group and founder of the Lab. 

The FCA’s ESG Division is joining the lab to build new partnerships and collaborate on research opportunities. “In a fast-moving and challenging space, positive ESG outcomes will depend on sharing experiences and providing mutual support,” said Sacha Sadan, Director of ESG at the FCA.

3) IIGCC warns against ‘paper decarbonization’ in transition plans

A transition plan framework for UK corporations and financial institutions should discourage companies from offloading their stakes in carbon-intensive companies, a letter from the Institutional Investors Group on Climate Change (IIGCC) says.

The letter, published Monday, warns that such actions — which it calls “paper decarbonization” — do not facilitate real-world emissions reductions nor reduce climate risk. “While this approach may reduce the direct risks that companies and investor face from the low carbon transition, it will have no impact on the systemic risks posed by climate change, which require rapid and ambitious real-world emissions reductions on an economy-wide basis,” the letter says.

The letter was a response to the UK Transition Plan Taskforce’s (TPT) Call for Evidence on its Sector-Neutral Framework for company-level transition plans. The TPT, which is backed by the UK Treasury, was set up to help companies draft “standardised and meaningful plans” to decarbonize their businesses and align with the UK’s net zero by 2050 goal. 

To ward off “paper decarbonization”, the IIGCC says the TPT should set “clear expectations that companies and investors should achieve emissions reductions through transitioning their business models and strategies and engaging with existing holdings to reduce their emissions where possible.” However, the group allowed that the divestment of carbon-intensive assets could be used “as a last resort” if and when engagement with investees fails.

The TPT consultation closed on July 13.

4) Corporate bonds are the most carbon-intensive financial assets — MSCI

Financed emissions are highest for corporate bonds, a study by investment research firm MSCI suggests.

The company assessed the financed emissions of investible indexes and representative portfolios representing $1 million of global equities, sovereign bonds, corporate bonds, and municipal bonds. 

This found that corporate bonds finance the most planet-warming gases, and that US dollar-denominated high-yield corporate bonds are more emissions-intensive than investment-grade paper. The study identified two factors behind this. One, high-yield debt indices contain bonds sold by the emissions-intensive energy sector. Two, the debt of utilities, energy, and financial companies in these indices are more carbon-intensive relative to their investment-grade counterparts.

MSCI used the financed emissions calculation standard established by the Partnership for Carbon Accounting Financials (PCAF) and its own “Total Portfolio Footprinting” solution to conduct the study.

The PCAF standard scores the quality of emissions data used to produce financed emissions figures on a scale of 1 (highest quality) to 5 (lowest quality). MSCI found that most global equities, sovereign bonds, and corporate bonds had a quality score of 2, meaning their emissions data is derived from actual reported emissions or information on the primary physical activity of the company’s energy consumption. However, quality scores for certain assets were much poorer. For example, municipal bonds’ financed emissions had a quality score of 5, meaning the underlying emissions data was solely produced using models.

5) Investment funds to overshoot climate targets

Over 70% of financial assets held by the world’s biggest investment funds are not aligned with a 1.5°C by 2050 warming target on average, an analysis by sustainability data firm ESG Book shows.

The company, which counts Allianz, HSBC, and Deutsche Bank among its clients, also found that across funds managing $40 trillion, emissions data is not reported by 20% of underlying assets on average. ESG Book assessed 35,000 funds from around the world for the study.

An analysis of stock indices by the company found that the Dow Jones Industrial Average, the US’s blue chip index, has the lowest emissions intensity. Companies in the index emit 40 tons of carbon dioxide equivalent (CO2e) per million dollars of revenues. On the flipside, the ASX 200, Australia’s prime index, has the highest emissions intensity, at 327 tons of CO2e per million dollars of revenues.

ESG Book has launched “Fund Scores” to help clients rate the sustainability characteristics of over 4,000 exchange-traded funds and 30,000 mutual fund listings, offering investors insights into the ESG and climate performance of major equity, corporate bond, and hybrid investment strategies.