Net-zero targets for investment portfolios: An analysis of financed emissions metrics

Abstract

Financial institutions and investors aligning their investments with the objectives of the Paris Agreement, implementing the Task Force on Climate Disclosure recommendations, or seeking to reduce financial risks arising from the transition to a low-carbon economy, frequently measure, report, and set reduction targets for the emissions associated with their investments—called their ‘financed emissions.’ In this paper, we analyse the relationships between reductions in financed emissions and reductions in physical atmospheric emissions. We find that, unlike country-level GHG targets, reductions in a portfolio’s financed emissions has little direct relation to changes in physical emissions; over a 95% reduction in financed emissions can be achieved using industry-standard methods even while physical emissions from a portfolio’s companies are increasing. This creates a substantial risk of misaligning portfolios – and investment decisions – to climate mitigation efforts and net-zero commitments. We analyse the different financed emission definitions and targets currently in use and suggest alternative means by which investors can credibly align their portfolios with the transition to a low-carbon economy.