Weekly round-up: August 8-12
1) GFANZ publishes guide on portfolio alignment metrics
The world’s largest climate finance initiative wants to improve how financial institutions track the alignment of their portfolios with net-zero goals.
On Tuesday, the Glasgow Financial Alliance for Net Zero (GFANZ) proposed new and enhanced guidance on developing and using portfolio alignment metrics (PAMs). These metrics determine how in-sync companies are with selected warming pathways, typically by using forward-looking climate scenarios and emissions data. They allow financial institutions to understand how aligned their investment, lending, and underwriting activities are with global climate goals.
The use of PAMs has surged in recent years, with institutions including Axa, Willis Towers Watson, and UBS all making use of these tools as part of their net-zero strategies. Financial data companies and service providers such as MSCI and Moody’s have also developed proprietary tools that firms can use to gauge their portfolio alignment.
However, despite their burgeoning popularity, GFANZ warns that “[b]arriers to the wider adoption of portfolio alignment metrics remain and must be addressed” and that challenges remain when it comes to selecting the assumptions that underpin PAM outputs. To address these issues, GFANZ’s guidance includes enhancements to pre-existing standards for constructing PAMs that were originated by the Portfolio Alignment Team, a task force made up of climate finance professionals who published reports on designing effective PAMs in 2020 and 2021.
For example, the GFANZ guidance includes an “illustrative credibility framework” that institutions can use to judge the integrity of companies’ net-zero transition plans. This could help firms to more accurately estimate their counterparties’ future emissions — data essential for tracking their alignment with warming pathways.
The guidance also has recommendations on addressing the Portfolio Alignment Team’s nine “key design judgments” for making effective, decision-useful PAMs. GFANZ hopes that convergence around best practices in PAM design will help financial institutions better direct capital in support of the net-zero economy.
“Growing global scrutiny of transition plans makes the need for business action on climate ever more urgent,” said Mary Schapiro, Vice Chair of GFANZ. “If financial institutions are to deploy the capital required to usher in the net-zero transition, they need a way to measure whether their financing activities align to their ambition.”
GFANZ welcomes public feedback on its guidance until September 12.
2) Banks warn ISSB on splintering of climate disclosures
Banks and public financial institutions have urged the International Sustainability Standards Board (ISSB) to take steps to prevent the fragmentation of climate- and ESG-related disclosure rules around the world.
The global standard-setter closed a consultation on its draft disclosure standards on July 29. Over 1,300 comment letters were submitted by banks, asset managers, non-financial companies, and public agencies, the board said last Friday.
Many of the letters from financial institutions emphasized the importance of harmonizing the disclosure standards across jurisdictions. In its letter, the European Central Bank (ECB) pressed the ISSB, along with national and regional standard-setters, “to actively cooperate to minimise divergences” in reporting rules. It also called on jurisdictions to ensure the “interoperability of national and regional standards and the ISSB global baseline.” To this end, the ECB urged the ISSB and European Financial Reporting Advisory Group (EFRAG), which is working on European-specific sustainability reporting standards, to “intensify their bilateral interactions to ensure the closest possible alignment between the two standards.”
Private banks similarly called for the harmonization of standards across jurisdictions. National Australia Bank warned the ISSB that it had identified fragmentation between the draft standards and other disclosure frameworks, rules, and jurisdictional authorities. It encouraged the ISSB to “remedy these where possible.”
UK lender Standard Chartered encouraged the ISSB “to collaborate with relevant agencies at all levels to reduce the risk of significant deviations in local implementation [of the disclosure rules].” Lloyds, another UK bank, said that the ISSB standards would benefit from aligning with the US Securities and Exchange Commission’s own climate risk disclosure proposal, particularly its “safe harbor” proposals for Scope 3 emissions, transition plans and scenario analysis disclosures.
North American lenders also weighed in. The Canadian Bankers Association noted that divergence in climate-related disclosure methodologies and requirements are emerging already “which could result in added confusion for investors and other stakeholders, operational challenges, reporting burden for preparers, and increased compliance costs.” It recommended the ISSB “take a lead role” in fostering harmonization “by actively identifying and addressing differences among the various frameworks and standards.”
3) Net zero asset owners push for extra metrics in EU climate reporting rules
European sustainability reporting standards should prioritize climate metrics for carbon-intensive industries so that financial institutions can better track real-world emission reductions, the Net Zero Asset Owners Alliance (NZAOA) has said.
In a statement published Tuesday, the alliance said that draft climate change disclosure rules drawn up by the European Financial Reporting Advisory Group (EFRAG) should add in “certain highly relevant and decision-useful sector-specific metrics” for 12 sectors, including oil and gas, utilities, transportation, and agriculture.
For instance, oil and gas companies should be required under the EFRAG standards to disclose their physical carbon intensity as well as their physical methane intensity, the NZAOA said.
The metrics for these 12 sectors should be reported as of the current year and estimated for 5 years and 10 years into the future, the NZAOA added. This data would enable asset owners to more accurately map the alignment of their own portfolios to net-zero targets.
EFRAG was tapped by the European Commission (EC) to draw up sustainability reporting standards which companies will use to meet disclosure requirements set out under the European Union’s Corporate Sustainability Reporting Directive (CSRD). A consultation on the first chunk of standards covering environmental, social, and governance topics closed on Monday. After incorporating the public feedback received, EFRAG will relay a final draft of its standards to the EC in November this year.
4) FCA warns funds on ESG marketing
UK hedge funds and private equity firms that sell ESG products should expect the Financial Conduct Authority (FCA) to scrutinize their offerings for evidence of greenwashing.
In a letter sent to the chief executives of alternative investment funds, the FCA said that firms promoting ESG investments may be “subject to review to ensure marketing materials accurately describe their product.” Documentation around these products should be “clear, not misleading,” the FCA added. Firms’ investment strategies must also “match the stated [ESG] claims.”
“It is important that investors have confidence in the products they are being offered, and this has specific relevance for products labelled as being ESG focussed and with investment strategies benchmarked against ESG themes,” the letter said.
The FCA reiterated that ESG is a “priority area” when it comes to the asset management sector.
5) Few asset managers show how their portfolios track climate goals
Less than one-third of European and US asset managers are able to report their portfolios’ alignment with a 2°C climate change scenario, a survey conducted by Boston-based consultancy Cerulli Associates shows.
Twenty-nine percent of European asset managers and 18% of US managers said they report using this metric. For asset owners, the figures were 44% and 24%, respectively. Cerulli Associates did not disclose how many respondents answered its survey.
Many more firms reported the carbon footprint of their portfolios. Among European respondents, 88% of asset managers and 61% of asset owners said they disclosed this metric, while for US entities the shares were 79% and 46%, respectively.
The consultancy predicts that Implied Temperature Rise — a type of portfolio alignment metric that assigns investments a ‘score’ expressed in degrees of warming — “will become the default metric for measuring a manager’s portfolio temperature.”
“Over the next 12 to 24 months, asset managers should anticipate a strong uptick in interest in measuring portfolio temperatures. The greatest demand for such solutions will come from insurers in France, the Nordics, Benelux, and the UK. Large insurers, especially those in France, already are modeling carbon emission trajectories across their investments,” Cerulli said.
The survey also found that 38% of US asset owners currently demand climate risk reporting from the managers they employ, and an additional 34% plan to require this kind of reporting within two years.