LSE research measures corporations’ progress on transitioning to a low-carbon economy, which supports a global investment initiative to act against climate change.
What is the problem?
Climate change is one of the defining global risks of the 21st century. To avoid its worst impacts, the world’s economy needs to make the transition from fossil fuels to renewable energy; from energy-intensive modes of production to energy-efficient ones; and from extensive use of land and unsustainable practices in agriculture to a food system with a smaller carbon footprint. A successful transition requires a huge reallocation of capital from high-carbon to low-carbon assets.
For corporations to survive, they must radically reduce their carbon footprints. Many big investors, motivated by ethical considerations, want to take a lead in driving the low-carbon transition. Others may be less motivated by ethics but are nonetheless concerned with managing their investment risks, avoiding, for instance, holding so-called “stranded” fossil fuel assets once demand has fallen away. To transform their business towards supporting a low-carbon economy, investors need reliable, transparent data on firms’ actions on climate change.
What did we do?
LSE’s Grantham Research Institute had previously created a public database of global climate change laws, Climate Change Laws of the World. Investors saw the potential to create a similar tool for the corporate domain, with the unit of analysis switching to the company, and approached the Institute to develop this, building on its expertise in the field of sustainable finance.
This resulted in the Transition Pathway Initiative (TPI), a unique investor-led partnership between a commercial data/index provider (FTSE Russell, a subsidiary of London Stock Exchange Group), an international NGO (Principles for Responsible Investment), and a university (LSE).
Professor Simon Dietz and LSE colleagues produce the comprehensive, rigorous, and impartial data that goes into TPI, which analyses whether a company’s practice is aligned with the goal of limiting global warming to 1.5°C. Companies are assessed on both their carbon governance and management practices, a precursor to climate action, and their greenhouse gas emissions pathways, the ultimate output and what matters to the planet.
All company assessments are subject to extensive quality assurance, including internal peer-review and review of draft assessments by the companies themselves, and the methodology and results are available online, free to access and easy to use.
TPI assessments now cover 479 of the world’s highest-emitting companies across 16 sectors. They show that while a majority of companies have introduced basic carbon management activities, such as having a corporate climate change policy, few have implemented more strategic practices such as using an internal carbon price in capital budgeting, and most companies have not yet set quantified targets. This suggests investors should focus on persuading companies to set long-term corporate targets as part of a larger set of substantive carbon management practices, if they are to contribute to avoiding dangerous climate change.
TPI provides a powerful new tool for investors who want to re-allocate their capital to low-carbon companies and engage with companies they invest in to encourage change.
TPI’s investor supporters now number 124 asset owners and managers with a collective US $40 trillion of assets under their management/advice (as of 6 May 2022). At this scale, investments informed by TPI data have the potential to materially affect the allocation of capital between clean and dirty assets, as well as to change the behaviour of companies through investor actions.
TPI data is used by investors in several ways, including: to decide which firms to invest in, and which companies to exclude; to provide information for investors to engage with companies on better disclosure of information and more robust carbon policies; and to shape company action through shareholder voting strategies.
For example, TPI is an official data-provider to the Climate Action 100+ Initiative, launched in December 2017. With 545 signatories, the Initiative has targeted some of the world’s highest-emitting corporations to improve their management of climate change and reduce their carbon footprint. It uses TPI data to monitor the progress of these corporations, to engage with them on specific management practices and actions they are not taking but should be, and to measure whether the Initiative’s actions are making a difference. The latest update of Climate Action 100+ company scores, informed by TPI research, was published in March 2022. It found that 69% of focus companies have committed to achieve net zero emissions by 2050 or sooner across all or some of their emissions footprint.
As well as being an important resource in its own right, TPI is being used to create additional tools for a transition to a low-carbon economy. In January 2020, the Church of England Pensions Board, working with FTSE Russell, launched a new climate investment index, the FTSE TPI Climate Transition Index, with an initial allocation of GB £600 million. Using TPI data, it is the first global index to embed forward-looking carbon performance, and is designed to reward companies with public targets aligned to the Paris Agreement, while significantly underweighting or excluding those that do not. At its launch, the Archbishop of Canterbury commented that the Index “demonstrates that it is possible to act, to take leadership and in doing so challenge the market.” The New York State Common Retirement Fund (CRF), the United States’ third-largest public and North America’s fifth-largest pension fund (US $255 billion), has chosen the FTSE Russell 1000 TPI Climate Transition Index for a substantial allocation on the road to transforming their investment portfolio towards net zero.