OUR RESEARCH

OUR RESEARCH 2018-06-11T15:25:19+00:00

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In 2016, the Paris Agreement defined the global objective of making financial flows consistent with the commitment to limit global warming to well below 2°C (Art. 2.1c). However, pilot studies suggest that the behaviour of institutional investors around the globe will lead to global warming of well beyond 4°C, resulting in major environmental upheavals.

The Paris Agreement Capital Transition Assessment (PACTA) project helps address this gap, providing policymakers and financial supervisors with the tools they need to align financial flows with the Paris Agreement’s goals.

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Since the launch of our online PACTA tool in September 2018, there has been significant uptake, with more than 800 users testing more than 4,500 portfolios as of mid-2019. However, most interest thus far has been concentrated in the US, UK, and other major developed markets, with relatively less knowledge of the tool in emerging markets. To address this issue, with support from the International Climate Initiative (IKI) of the German Environment Ministry, 2°ii launched the PACTA for Emerging Markets project in July 2018. The goal is to help promote the PACTA tool in emerging economies, providing policymakers, regulators, institutional investors, and banks with an assessment framework to measure the alignment of financial portfolios and markets with climate goals, as well as transition risks. 

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Partnership with the California Department of Insurance

Insurance companies based in California face two increasingly critical types of climate-related risk. The first stems from their exposure to fossil-fuel investments, which are liable to precipitously lose their value as the world shifts to a low-carbon economy. The second stems from the state’s growing vulnerability to the effects of climate change, with natural disasters such as forest fires on the rise.

To help the state raise awareness of and cope with these risks, 2°ii has collaborated with the California Department of Insurance since 2016 to conduct analysis and provide information on climate change-related risks to insurers’ bond and equity portfolios.

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Helping non-state actors set and implement climate change action strategies

Currently, non-state actors (NSAs), particularly companies and financial institutions, have limited ability to assess how their energy- and climate-related commitments will contribute to the goals of the Paris Agreement, and how to set targets that are aligned with these goals. For instance, companies frequently lack visibility on climate strategies and regulations at the sectoral level, which reduces their willingness to invest in low-carbon technologies. Meanwhile, institutional investors lack standard metrics to select companies whose technological mix/emission pathways are best aligned with a 2°C target.

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KR Foundation – WWF Asset Owner Project

Empowering retail investors to divest from fossil fuels

Currently, certain aspects of the European Sustainable Finance Action Plan are not being implemented, particularly when it comes to efforts to respond to retail investors’ non-financial investment objectives.

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The Climate Finance Product Scanner for retail investors and banks (KliFin-Scanner) is developing a questionnaire on non-financial objectives for retail investors. The questionnaire will enable retail investors to create an investment profile based on their individual extra-financial objectives. This can then be matched to financial products. The questionnaire and matching software will be integrated in a website available to all retail investors in Germany. It will be open-source and available as a white label solution that can be integrated into banks’ infrastructure. The project run-time is from 1 January 2018 to 30 June 2020.

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Click on the icons to download our studies.

December 2019

New report shows growth of “climate target-setting” in shareholder resolutions & their potential to cascade investors’ climate pledges to companies

 Key figures:

  • We analysed over 7,500 resolutions and identified 500 as climate related
  • From 2006-2019, over 150 shareholder resolutions involving some form of requirement to set climate target or a related business plan were introduced
  • Explicit references to the Paris Agreement are on the rise, with 11 resolutions pushing for consistency with the climate goals of the Paris Agreement
  • For the first time, in 2018, 3 companies subsequently adopted these targets. While the analysis does not prove causality, it represents a first step in understanding the potential impact of engagement.

Key takeaways:

  • These figures show the potential of resolutions to turn words into actions, “passing the baton” from investors who committed to aligning their portfolio with Paris goals to their investees
  • They illustrate the need to further organize and engage in collective shareholder actions, such as the Climate Action 100+ coalition
  • They also reveal the gap: among 500 climate-related resolutions, only 11 resolutions requested consistency with a 2°C pathway or better. Given the recent investor pledges, we expect Paris-aligned resolutions to rise dramatically in the next few years

Please see here for the full report.

 

November 2019

According to the OECD, meeting the 2°C scenario will require $6.9 trillion annual investments in infrastructure until 2030, versus $6.3 trillion annual investments in a business-as-usual scenario. These investments require precise alignment among governments, corporates, and investors.

However, several important factors hinder efforts to channel investments towards low carbon pathways. For instance, governments frequently lack the referential frameworks and tools to develop national climate strategies (national determined contributions, or NDCs) that are consistent with the 2°C scenario. Likewise, corporates often lack visibility on public climate strategy at national sectoral level, which weighs on their confidence in investing in low carbon technologies.

To address this market gap, the 2° Investing Initiative and Beyond Ratings, a provider of data and analytics services for the investment industry, have joined forces to develop an innovative methodology and suite of services known as the Climate Tech Compass.

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In November 2019, InfluenceMap published a new report, FinanceMap, which examines how the asset management sector performs on portfolios, engagement, and resolutions. We were proud that our Paris Agreement Capital Transition Assessment (PACTA) methodology played a key role in the analysis. Please see the report here and the executive summary below.

This report received support from EIT Climate-KIC and KR Foundation.

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October 2019

Journal of Sustainable Finance & Investment

Jakob Thomä, Clare Murray, Vincent Jerosch-Herold & Janina Magdanz

Despite the political mandate of Article 2.1(c) of the Paris Agreement (United Nations 2015. ‘Adoption of the Paris Agreement.’ 21st Conference of the Parties, Paris, United Nations, 2) to align finance flows ‘with a pathway towards low greenhouse gas emissions and climate-resilient development,’ many investors do not manage
physical and transitional climate risks. The Task Force on Climate Related Financial Disclosures’ 2019 Status Report highlighted this asymmetry. The following paper seeks to evaluate the efficacy of informing investors about the alignment of their portfolios with the Paris Agreement. Based on survey feedback from a 2017 pilot study conducted with Swiss pension funds and insurance companies, the results suggest that after the pilot 40% of respondents implemented a climate strategy or integrated climate criteria into their investment process, showing the potential
impact of climate assessments on portfolio strategy. This fact affirms both the positives of portfolio climate assessments, but also the need to explore alternatives avenues for engaging with investors regarding climate risks.

Full report

A study of climate change-related risk and its implications for the insurance market, published by the Federation of Colombian Insurers (Fasecolda). In Spanish.

By Andrés Leonardo Jiménez, Sustainability Professional, Fasecolda; Daniel Guerrero, Analyst, 2° Investing Initiative; and Laura Ramírez, Programme Manager for Emerging Markets, 2° Investing Initiative

June 2019

With its Action Plan on Financing Sustainable Growth, the European Commission set the ambitious goal of “reorienting capital flows toward sustainable investment”. This objective seems ideally aligned with the strong momentum of impact-related concerns as to financial products among retail investors and numerous financial institutions. Concurrently, the evolution of several financial regulations at the EU level appears to support this movement. In this context, however, the recent EU Ecolabel Technical Report issued by the EC’s JRC has raised serious concerns as to its consistency with such trends. This papers shows that the approach developed in the Ecolabels Report is technically inaccurate, as it is based on flawed assumptions regarding impact in the context of finance, and does not comply with the EU’s own regulations as regards to Ecolabels. As such, the proposed approach appears to be a dead end, generating potential financial and legal risks, especially from a consumer protection perspective, and undermining the overall environmental objectives of the EU. This paper suggests an alternate approach, consistent with the state of scientific research and compliant with existing rules on the Ecolabel and consumer protection, which centers on implementing an Environmental Management System to design and execute the investment strategy.

Full text