Scepticism and the adoption of proprietary frameworks

Although a target-setting framework is key, the link between framework adoption and impact is unclear. While the majority (57%) of asset owners believe that using established climate-related target-setting frameworks has a real impact on emissions levels, these frameworks may constitute a roadblock. A notable minority of asset owners (34%) state that using established frameworks actively prevents investments from making a real-world impact. Moreover, 44% think their frameworks fail to support real-world impact in emerging markets.

A clear divide on impact

The view that established frameworks are preventing real-world impact could be leading to a wider adoption of proprietary target-setting frameworks. Overall, almost half of asset owners (48%) use fully or largely proprietary frameworks that are developed in-house or with the help of a consultancy for setting climate-related investment targets.

Those who believe in the effectiveness of established frameworks are more likely to follow the Science-Based Targets initiative (SBTi) framework to the letter than use a custom/proprietary framework.

Spaargaren highlights PME’s need for flexibility in choice of framework: “We are looking into SBTi because the framework is ambitious and it’s setting the baseline on how and when companies should comply with the Paris Agreement pathway,” he says. “In addition, we use the Partnership for Carbon Accounting Financials (PCAF) methods for measuring our carbon emissions. And we also comply with TCFD guidelines for our annual reporting.”

The need for greater standardisation

Interestingly, many asset owners feel that stricter mandatory targets are still needed to achieve real impact. Although several asset owners are using proprietary or consultant-developed frameworks, 43% say that there is too much discretion permitted in the selection of climate-related targets and 44% say the same about the metrics that underpin them.

The implied frustration here suggests that asset owners may be open to a more prescriptive approach to facilitate real-world impact.

Hortense Bioy, Global Director of Sustainability Research at Morningstar, a provider of investment data, research and analytics, agrees that standardisation is required. “There is still no consensus on what companies should report on and methodologies. The lack of consistency in disclosure makes it hard to compare and analyse data across companies,” she explains. “One key metric that is still being debated is Scope 3 emissions, which are notoriously difficult to calculate. Regulators around the world are still debating whether or when to mandate Scope 3 disclosure. We think the sooner the better even if the data is imperfect.”

As Bioy explains, a standardised framework would need to incorporate forward-looking metrics that give a full picture of an investment’s future impact. Notably, this would help asset owners support a just transition in emerging markets, a highly challenging task.

“Many financial institutions are having to grapple with the concept of a just transition, and the social and economic impacts of investing in climate-aligned assets. So, how it impacts labour, social mobility, equality, migration and health, and all these other issues, which can be a side-effect or second-order impact of climate investing,” says Michael Wilkins, Executive Director and Professor of Practice, Centre for Climate Finance & Investment, at Imperial College Business School.