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With the rise of net zero commitments comes the need to improve transparency and accountability to track whether these commitments translate into action. Financial institutions are playing a leading role in the push to align with net zero and at COP26 The Glasgow Financial Alliance for Net Zero (GFANZ), a group of investors, banks and insurers overseeing $130 trillion in assets, pledged that their investments would hit net zero emissions targets by 2050.* For these financial institutions, meeting their own net zero targets will require a more granular understanding of how portfolio companies will progress towards their individual emissions reduction goals.
As the Task Force on Climate-related Financial Disclosures (TCFD) and other initiatives seek to promote forward-looking transition risk metrics that meet investor and market demand for transparency, portfolio temperature alignment datasets are growing in popularity. While boiling a complex set of variables into a single implied temperature rise will always present some uncertainties, such datasets can help indicate the climate pathway and associated warming outcomes associated with a security or portfolio. This provides insights into the trajectory associated with current corporate climate commitments, helping to direct engagement, benchmarking or alignment of portfolios and funds.
For example, Moody’s ESG Solutions’ new Temperature Alignment Data finds that despite an increase in corporate climate commitments, only 42% of about 4,400 assessed companies have set emissions targets, and only 11% of companies have set quantifiable, forward-looking targets extending to at least 2030.
Aligning with net zero emissions by 2050 has emerged as a key global goal, given the stark message in the 2018 IPCC Special Report on Global Warming of 1.5°C that this is required if we are to keep global warming to 1.5°C by 2100 and avoid the worst physical climate impacts. However, only 3% of our assessed companies are aligned with a future of net zero by 2050. The average temperature rise across the assessment universe is 2.9°C.
Banks and asset managers can use these findings and the underlying company data to quantify and monitor company emissions targets and the temperature alignment of their portfolios, while companies can benchmark their emissions targets against peers and market benchmarks. This in turn enables financial institutions to unpack the implications of net zero commitments, improving transparency in their portfolios and, in turn, the market.
For more key findings on companies’ alignment with different temperature futures read our new report, Corporate emissions targets failing to keep pace with 1.5°C trajectory and learn more about our Temperature Alignment Data here.
*Note: Moody’s is a member of the Net Zero Financial Services Provider Alliance, which is part of GFANZ.