This report supports the case for real world decarbonization tracking and demonstrates its application at portfolio and company level.
On the portfolio level, target setting initiatives and portfolio alignment approaches should integrate a transparency requirement on how portfolio emissions reductions are achieved. If your portfolio became more climate-aligned between 2020 and 2022, what drove that improvement? Did portfolio emissions reduce through portfolio reallocation or because underlying investee companies became greener? Only if the companies themselves have become greener could we begin to see potential emission reductions in the real world. This approach is consistent with GHG Protocol and the PCAF standard, as well as key recommendations from GFANZ, the Financial Sector Expert Group COP26. It was also supported by over 80% of respondents as part of a pulse survey of 50 market actors conducted by 2° Investing Initiative (2DII) in 2020.
But even then, a second level of analysis is needed to really understand if emissions have been reduced. The case-studies in this report for the Switzerland climate alignment assessment and the Swedish pension fund AP2 demonstrate the limitations of investigating aggregate portfolio emission changes without a second layer of analysis. What’s more, over the past few months, we’ve seen numerous examples of companies selling their fossil fuel assets under investor pressure. These selloffs of fossil assets did indeed make the companies greener, and thus made the investor portfolio more climate aligned from a portfolio emissions perspective. However, in many cases no real world GHG emission reductions were achieved as the underlying fossil assets kept producing and thus emitting. In fact, in some cases, the sold fossil assets ended up producing more and thus emitting more than before, leading to a perverse world where investor pressure and more climate aligned portfolios are leading to higher real world GHG emissions. Only by tracking what happens over time to the underlying physical assets, can we understand if real world GHG emissions reductions have been achieved, rather than only portfolio GHG emissions reductions.
The PACTA team is working on implementing this approach into the PACTA tool and methodology, starting with the power sector. The goal is to move towards integrating this approach across the entire PACTA methodology and tool