Maintaining a portfolio that is consistent with the Paris Agreement

We said...

We will measure the temperature rise implied by the assets in our portfolio. We will aim for this implied temperature rise (ITR) to be consistent with the Paris Agreement to keep global temperature rises well below 2°C by the end of the century. The ITR is a way of showing the estimated global warming impact of the likely carbon footprint of the portfolio. In many ways, projections such as this are more useful for making decisions than considering historic portfolio emissions. The implied temperature rise is calculated by estimating a global ‘carbon budget’ – the amount of greenhouse gas (GHG) that humanity can emit and still be likely to meet the goals of the Paris Agreement. This global carbon budget is then allocated to each sector and each company within that sector, allowing us to compare each company’s projected future GHG emissions against its carbon budget. Companies with credible, ambitious net-zero plans are better placed to operate within their carbon budgets than those with no plans in place. Examples are provided below

By comparing each company’s estimated future emissions against its budget, it is possible to identify if they are on track to overshoot or undershoot their budget and from there, calculate the ITR. The ITR can help tell us what the global temperature rises will be by the end of the century if all companies and sectors over or undershot their carbon budget to the same extent.

In the same way, an implied temperature rise for our portfolio can be calculated by comparing the total projected GHG emissions of all companies in the Global Equities Fund (GEF) against their total carbon budget. The GEF had an implied temperature rise of 2°C at 31 December 2021 which is in line with the Paris Agreement. This is well below the implied temperature rise of the GEF’s investment benchmark, which was 2.8°C at the same date.

We will monitor the implied temperature rise and review other potential forward-looking information. Our goal of ensuring that our implied temperature rise remains consistent with the Paris Agreement is a deliberately challenging one. We want the companies in our portfolio to have projected emissions that are within their budgets and we will engage with companies that are operating outside their carbon budget to encourage them to improve.

Where are we now?

At the end of June 2023, the implied temperature rise of our listed equity portfolio was 1.7º degrees, 0.3º degrees lower than the December 2021 position. We are hitting our goal of keeping our implied temperature rise measure at or below 2ºC, which is in line with the Paris Agreement.