At the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change [UNFCCC] in December 2015, 197 member states negotiated an agreement to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development” and to limit the rise in global temperatures to no more than 2°C above pre-industrial levels. The agreement reached the threshold for entry into force the following year, setting the trajectory for a global low carbon economy.

The investment community has been instrumental in translating these objectives into initiatives. The rhetoric has changed from “how useful are portfolio footprints?” to “how can we do more?”

Alongside listed equity, market participants are addressing the carbon risks embedded in other asset classes, from fixed income to real estate and infrastructure. They are stress-testing holdings for the impact of future carbon regulatory scenarios, setting portfolio energy transition targets, and quantifying revenues from green products and services.

The current environment is a hotbed of collaboration, innovation and, crucially, action.

Just as a range of financial metrics is used to understand the financial health and value of a company, so too should a range of metrics be used for climate risk analysis. Different metrics isolate risks and opportunities in different areas—their value depends on the question a market participant wants to answer.

The S&P Dow Jones Indices Carbon Scorecard stands as a barometer for the carbon efficiency of the markets today and the direction of travel for the economy. The report reflects the market sentiment for transparency and demonstrates the range of metrics that market participants now use to understand carbon risk and opportunities for green growth. It also shows market participants how these metrics can be applied to build climate resilient portfolios, regardless of style factor or geography.

Carbon and energy risks are analysed in five ways:

  1. Carbon Footprint
  2. Fossil Fuel Reserve Emissions
  3. Coal Revenue Exposure
  4. Energy Transition
  5. Green-Brown Revenue Share

We are already seeing a significant shift in the allocation of capital and the pathway to a low carbon future is becoming easier to follow.