Transition Pathway Initiative

Overview: 2017/2018 Enhancements to the FTSE Russell Climate Change Research Methodology

In the wake of the final recommendations from the Financial Stability Board’s (FSB’s) Task Force on Climate-related Financial Disclosures (TCFD), FTSE Russell has significantly revamped and enhanced its research on climate change. We have made four major changes that will enable the Transition Pathway Initiative to align its Level 0 to 4 Management Quality indicators with the TCFD’s recommendations:

  1. We have updated our categorisation of sectors to reflect carbon emissions normalised by revenue. We now have three categories – primary impact (e.g. airlines, integrated oil and gas, paper), secondary impact (e.g. food products, hotels, transportation services) and tertiary impact (e.g. apparel retailers, medical supplies, software). While we acknowledge that there may be companies in the lower impact sectors that have higher carbon emissions (and vice versa in the higher impact sectors), this provides an effective categorisation of companies and aligns carbon impact with FTSE Russell’s wider approach to sectoral classification (ICB).
  2. We have added seven new indicators that speak directly to the changes proposed by the TCFD. These are:
    • The recognition of climate change as a relevant risk and/or opportunity to the business, and the timeframe over which this is assessed.
    • How climate-related risks and opportunities are incorporated into strategy (mitigation, new products, R&D, etc.) and capital allocated (OPEX, CAPEX, M&A, debt).
    • Whether the company has conducted climate scenario analysis and described the business impacts of one or more climate scenarios.
    • Exploration and production intensity as measured in GHG emissions per barrel of oil equivalent (for exploration and production, and integrated oil and gas).
    • Refining intensity as measured in GHG emissions per barrel of oil equivalent (for refineries and integrated oil and gas).
    • Cement production GHG emissions intensity as measured in GHG emissions per tonne of cement/cementitious material (for cement).
    • Scope 3 emissions (3 years) split by category type.
  3. We have extended the coverage of 3 indicators to companies in tertiary impact (or low impact) sectors. These are the indicators relating to whether operational GHG emissions are independently verified, whether the intensity of operational GHG emissions has reduced, and whether operational energy consumption data are independently verified.
  4. We have started to collect data on sector-specific emissions and performance for companies in the oil and gas, electric utility, cement, real estate, metals and mining, chemicals, steel, food producers, paper and forest products, agricultural products, beverages, agriculture and asset owner/asset manager sectors. For example, in the oil and gas sector, we collect information on oil and gas production by hydrocarbon (oil, gas, oil sands), reserve replacement ratios (RRR), production cost by hydrocarbon (oil, gas, oil sands), flaring emissions (CO2e) and methane emissions (CH4).

These enhancements will allow us to more accurately assess the quality of companies’ climate change disclosures and performance, the impact of climate change on companies’ strategy, and the quality of the scenario analysis being conducted by companies. We have started to apply these indicators across the full universe of over 4,000 companies covered by our ESG research, and expect to have completed a full cycle of this research (i.e. assessed all companies using these new indicators) by June 2018.

Prepared by: Charles Fruitiere (ESG Analyst, FTSE Russell) and Dr Rory Sullivan (Head of ESG Standards, FTSE Russell and Expert Advisor, Transition Pathway Initiative).


TPI Commentary:

We have worked closely with FTSE Russell as it has gone through the process of revising its climate change indicators. The revisions will enable us to further align our Level 0 to 4 management quality framework with the TCFD’s recommendations and also enable us to conduct more sophisticated and robust analysis on some of our existing indicators.

FTSE Russell has presented these changes to the TPI’s Technical Advisory Group and we are now reviewing and revising the TPI’s indicators. Without pre-empting this work, our ambition is:

  • To have clear alignment between the TPI and the TCFD’s recommendations.
  • To introduce sector-specific indicators to complement the existing Management Quality indicators.
  • To introduce a new Level 5 (or extended Level 4) that fully assesses companies’ ability to strategically manage the transition to a low-carbon economy. We see this as providing us with an explicit link between our Management Quality indicators and our Carbon Performance assessments.

We have also started to develop proposals on how we might assess the quality of companies’ scenario analysis, in conjunction with FTSE Russell, TPI supporters and other stakeholders. We will offer suggestions on general, high-level indicators that may be adopted by FTSE Russell (e.g. does the company publish a scenario analysis? Does it document its assumptions? Does it identify its central scenario?), as well as on a more detailed framework that may be used to analyse individual scenario analyses.

Professor Simon Dietz, 20th September 2017