Designing temperature alignment metrics to invest in net zero: an empirical illustration of best practices

24 Pages Posted: 14 Jan 2022

See all articles by Thomas

Thomas

Lombard Odier & Cie

Michael Urban

University of Oxford

Foort Hamelink

Lombard Odier Asset Management (SA); VU University Amsterdam

Elise Beaufils

Lombard Odier Darier Hentsch & Cie - Lombard Odier Investment Management

Ben Caldecott

University of Oxford - Smith School of Enterprise and the Environment

Christopher Kaminker

Organization for Economic Co-Operation and Development (OECD)

Date Written: July 7, 2021

Abstract

The private sector is increasingly aware of the physical and transitional risks and opportunities associated with climate change. The Paris Agreement’s overarching objective is to keep “the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels”. However, Earth is currently on track for a 3.2°C warming by 2100, with further temperature increase thereafter. Consequently, financial institutions – both private and public – are rapidly rethinking how they assess risks and rewards and are working towards developing innovative ways of pricing what we term Climate Value Impact (CVI). CVI provides a quantified notion of whether companies are likely to be positively or negatively exposed to the physical as well as the political-economic effects of the climate transition. CVI encompasses transitional, physical and liability risks. Arguably, transitional risks are, as of today, the most material to investment decision-making because of the ongoing acceleration of climate mitigation responses. Implied temperature rise (ITR) metrics, a critical building block of CVI, are now rapidly gaining traction in the investment community. ITR metrics allow investors to assess their investment(s)’ climate performance – be it that of individual securities or of entire portfolios – against a reference benchmark. This metric brings a forward-looking perspective to carbon footprinting metrics, which assess historical emissions.

Suggested Citation

Hohne-Sparborth, Thomas and Urban, Michael and Hamelink, Foort and Beaufils, Elise and Caldecott, Ben and Kaminker, Christopher, Designing temperature alignment metrics to invest in net zero: an empirical illustration of best practices (July 7, 2021). Available at SSRN: https://ssrn.com/abstract=4008893 or http://dx.doi.org/10.2139/ssrn.4008893

Thomas Hohne-Sparborth

Lombard Odier & Cie ( email )

11 rue de la Corraterie
1211 Geneva 11
Switzerland

Michael Urban (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Foort Hamelink

Lombard Odier Asset Management (SA) ( email )

6 avenue des Morgines
Petit-Lancy
Geneva, 1213
Switzerland

HOME PAGE: http://www.hamelink.com

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Elise Beaufils

Lombard Odier Darier Hentsch & Cie - Lombard Odier Investment Management ( email )

Queensberry House
3 Old Burlington Street
London, W1S 3AB
United Kingdom

Ben Caldecott

University of Oxford - Smith School of Enterprise and the Environment ( email )

United Kingdom

Christopher Kaminker

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

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