Only 1.5% of Global Investment Funds Are Aligned with a 1.5ºC Scenario and None Are Aligned when Scope 3 is Considered

There is a transition to a lower temperature but assets are still not aligned with Paris Agreement

The Paris Agreement, adopted in 2015, is an international treaty under the UNFCCC to combat climate change. It aims to limit global temperature rise to below 2º C and strives for 1.5º C. The agreement outlines actions for countries to reduce greenhouse gas emissions and adapt to climate change impacts.

The agreement has influenced corporate action as well as the financial sector. Disclosing greenhouse gas (GHG) emissions and carbon reduction targets has become more common for companies, and the funds industry has integrated environmental considerations into investment decisions. Funds now prioritize companies engaged in climate-related initiatives, while avoiding carbon-intensive industries. However, this study shows that even if we have made some progress in the last two years, the starting point was very low and investment funds are still far from being aligned with the Paris agreements. Furthermore, way too many companies are either not disclosing their carbon reduction targets or setting their ambitions very low.

Recent developments such as the publication of the ISSB standards that require better disclosure of climate-related targets should contribute to shifting these trends. But it will take some time and ambition is just the starting point, what we all care about is impact on the real economy and actual carbon reductions.By leveraging CDP’s environmental disclosure platform and Clarity’s tech capabilities, we conducted a comprehensive global warming alignment analysis of over 23,000 funds, totaling more than $25 trillion in assets. To assess their temperature alignment, implied temperature rise (ITR) metrics from CDP were used which are based on the public CDP-WWF Temperature Ratings methodology. These ITRs are based on an assessment of corporate emission reduction targets and it does not measure actual alignment but alignment of ambition. For all companies without disclosed targets or insufficient disclosures of past GHG emissions, a default temperature score was applied.

The analysis focused on global funds with equity and corporate fixed income securities across various categories within Clarity AI’s global fund classification. These funds have significant assets under management as they invest in global securities and are among the world’s leading investment funds. The data used for the analysis was the most recent ITR in 2023.

NOTE: Data shown for 23,424 funds covering $25 trillion USD in assets under management. The CDP Implied Temperature Rating (ITR) average coverage for these funds was 86%. Data as of June 2023. Source: Clarity AI and CDP Research

The company temperature scores were aggregated at the fund portfolio level using a financed emissions weighting approach, meaning that each portfolio constituent’s individual temperature score was weighted by its portfolio share of financed emissions. For the calculation at least 60% of the portfolio value had a temperature score (the average portfolio coverage ratio was 86%).

NOTE: Clarity AI analysis shows that less than 1,000 funds (1.3% of the total assets under management) are Paris-aligned (Below 1.75º C bucket) based on the targets of investee companies and over 70% of all assets exposed are invested in funds with above 2.3ºC alignment. When Scope 3 is considered in the analysis, less than 0.1% of assets are Paris aligned and over 85% of assets are above 2.3ºC based on the targets of funds’ investee companies.

Our partner, CDP, published a similar analysis in October 2021. In this analysis more than 90% of assets were above 2.3ºC when Scope 1 and 2 are accounted for, and over 95% when Scope 3 is also accounted for.

NOTE: Data shown for 13,044 funds covering $22 trillion USD in assets under management. The CDP Implied Temperature Rating (ITR) average coverage for these funds was 85%. Data as of June 2023. Source: Clarity AI and CDP Research

For the 2023 results, when all the funds are aggregated by using an asset weighted approach, we have an average temperature rating of 2.4ºC for Scope 1+2 and 2.6ºC for Scope 1+2+3. For the October 2021 analysis, the aggregate temperature is 2.8ºC for Scope 1+2 and 3.0 for Scope 1+2+3.

NOTE: Data shown for 13,044 funds covering $22 trillion USD in assets under management. Data as of June 2023. Source: Clarity AI and CDP Research

NOTE: Data shown for 13,044 funds covering $22 trillion USD in assets under management. Data as of June 2023. Source: Clarity AI and CDP Research

Looking back at the results from 2021 and comparing those with recent data, we see that there has been a shift to a better temperature alignment. We analyzed +13,000 funds that are both in our recent analysis and in the analysis published in October 2021. The analysis shows that in both scenarios (Scope 1+2 and Scope 1+2+3) the primary reason for the shift to a lower temperature is the difference in temperature ratings for the individual holdings.

NOTE: Data shown for 13,044 funds covering $22 trillion USD in assets under management. Data as of June 2023. Source: Clarity AI and CDP Research

NOTE: Data shown for 13,044 funds covering $22 trillion USD in assets. Data as of June 2023. Source: Clarity AI and CDP Research

Looking into individual organizations:

– 51% of them continue to not have an ambition to be below 3º

– 30% have set a more ambitious target and therefore have reduced their ITR

– 12% did not have a target previously and now they do

– 5% have kept same target

– 2% have a worse target now therefore a higher ITR

NOTE: Data shown for 7,739 organizations. Data as of June 2023. Source: Clarity AI and CDP Research

This change in individual organizations is due because more companies, including from high impact sectors, joined the SBT initiative. In addition, more companies have also included targets when disclosed to CDP (166 companies from High impact sectors disclosed targets in 2022 and 83 disclosed in 2023).

The analysis conducted was based on implied temperature rise (ITR) metrics which measure the ambition of corporate emission reduction targets. It found that less than 1,000 funds (1.3% of total assets under management) are Paris-aligned (below 1.75ºC). The majority of assets (over 70%) are invested in funds with above 2.3ºC alignment, and this percentage increases when considering scope 3 emissions. Bottom line: The majority of global investment funds are not aligned with the goals of the Paris Agreement, only a small percentage (1.5%) are aligned with a 1.5ºC scenario, and none are aligned when considering scope 3 emissions. While there has been some progress in average temperature alignment, it is crucial to recognize that the global assets still have a long way to go to achieve Paris alignment. The opportunity for reaching the below 1.75ºC impact in the medium term does still exist. Additionally, it is important to note that these targets are based on mid-term ambitions for emissions reduction and do not guarantee successful fulfillment by organizations. Addressing the misalignment of investment funds with the goals of the Paris Agreement requires continued efforts from both the financial industry and companies across sectors. Increasing the number of companies setting ambitious targets and actively working towards reducing emissions is vital for achieving a sustainable and resilient global economy.