April 25, 2022
Generating emissions reports and an emissions reduction strategy are crucial steps for any business or organization. Understanding what best-in-class means for a specific sector is vitally important, too. Climate impact benchmarking uses Carbon Disclosure Project (CDP) emissions data to maximize an organization’s understanding of disclosed emissions and investments. This in turn empowers these organizations with clear and concise carbon performance information. This information can be used to make essential business decisions, particularly when it comes to future investments and sustainability goals.
Climate impact benchmarking is being used as a tool that allows investors to track their operational performance and investment results. Benchmarking portfolios’ investments for climate change risk may pose challenges. But this is primarily an issue for businesses and investors that use outdated financial benchmarks which aren't risk-adjusted for climate change. Modern benchmarking focuses instead on analyzing fund impacts on the environment. It then provides data that enables users to accurately benchmark and compare international industry classification sectors.
In this article, we’ll look at two types of climate benchmarks, how they differ, and how SINAI can assist in meeting benchmark goals.
Climate benchmarks are investment benchmarks that incorporate specific goals related to greenhouse gas (GHG) emission reductions and the transition to decarbonized economies. These benchmarks are based on scientific evidence from the Intergovernmental Panel on Climate Change (IPCC). The benchmarks are defined through a strategic selection and weighting process of underlying factors and constituents.
There are two newly defined benchmarks that organizations need to be aware of when working towards meeting their net zero goals:
• The EU Climate Transition Benchmark (EU CTB)
• The EU Paris-Aligned Benchmark (EU PAB)
Both benchmarks are similar in that they focus on a decarbonization level of at least 7% on average per year. But their thresholds differ. The EU PAB is aligned with the goal of the Paris Agreement to limit the global average temperature increase to below 2°C above pre-industrial levels.
As a whole, the EU PAB is more strict with its thresholds and exclusions than the EU CTB.
Compared to EU CTB, EU PAB allows for higher decarbonization of the investment relative to the underlying investable universe (50% compared to 30%). EU PAB also excludes companies involved in fossil fuel exploration and GHG-intensive electricity producers. It focuses more strictly on opportunities with a notably enhanced green share to brown share ratio. This means that EU PAB focuses on including more companies with a low carbon footprint (green shares) than companies with a higher carbon footprint (brown shares).
EU CTB benchmarks are better suited to the needs of institutional investors such as reinsurance firms and pension funds, whose goal is to guard assets against climate-change-related investment risks. The EU PAB benchmarks are best suited to institutional investors and firms that wish to be at the forefront of the rapid transition towards a +1.5°C world.
Past benchmarks including objectives or restraints related to greenhouse gas emissions have been inconsistent and poorly suited to the needs and constraints of investors. They have been primarily designed around minimizing tail risks and other related risks. Investors who use the new EU CTB and EU PAB benchmarks can hedge against a wider range of climate transition risks at a portfolio level. They can mitigate the technology risk impact of technological advancements during the transition towards a low carbon economy. And they can better invest directly towards more opportunities within the greater energy transition.
Investors can use the two new climate benchmarks in a variety of ways. They may serve as foundations for passive investment plans, or as investment performance benchmarks for emissions-related strategies.
Sector benchmarking enables organizations to rapidly understand how their sectors are performing on the whole. It helps them understand where their own businesses stand in relation to the latest benchmarks available. They can compare their own performance against the generalized performance of an entire sector. This process can position businesses as industry leaders. But even if an organization doesn't have this goal in mind, clearly understanding where the sector lies is essential to operating sustainably.
Businesses and firms across all major sectors are making moves towards ‘greening’ their products. They’re using climate impact benchmarking to differentiate their organizations in the eyes of existing and prospective employees and consumers. Sector benchmarking also empowers businesses to set realistic yet change-oriented organizational benchmarks to help them along their own paths towards a low-carbon operational strategy.
Sector analyses are vital. But being able to comprehend geographical performance across key sectors can be just as important. Geographical climate impact benchmarking allows organizations to assess how their business and investments are performing within a specific geographical region.
Factors that come into play with geographical benchmarking include where an organization operates, where its largest stakeholder bases are positioned, and whether or not they are facing new regulatory demands. Geographical benchmarking also aids businesses in comparing their geographical performance with similar sectors on a global scale.
Climate impact benchmarking sets the stage for companies to take action and drive change towards decarbonized economies. But before action can be taken, businesses need the right tools, data, and technology to build deep decarbonization strategies.
SINAI can help your organization reach its emissions-reduction targets, in line with the principles and guidelines of the Science Based Targets initiative. Our platform provides emission reduction tools to support organizations in achieving science-based targets and creating realistic, sustainable net zero targets.
Our decarbonization solutions will enable your business to quantify and report on achievable emissions targets and decarbonization budgets. Together, we can build strategies, transition risk management procedures, and automate greenhouse gas inventories through flexible data collection. Get in touch with us today.