Breakingviews – Green investing’s killer app faces growing pains

LONDON (Reuters Breakingviews) – Green investing may be on the brink of discovering its killer app. A growing number of climate finance mavens, including former Bank of England Governor Mark Carney, are increasingly excited by the potential of so-called “degree warming metrics”. Done properly, these could allow stakeholders to judge how well their investments align with the Paris accord. Yet with many different types available, a harmonised methodology ahead of next year’s Glasgow climate summit looks ambitious.

A passion fruit tree is pictured at the nursery of Kokkoya Organics, an urban organic farm in Yangon, Myanmar, May 4, 2019.

Carney is at the heart of efforts to get companies to disclose their climate risks. But that begs the question of what disclosure is actually helpful. Companies’ carbon footprints include so-called “Scope 1 and 2” emissions arising from production processes, and “Scope 3” ones emitted when their products are used, as when car engines burn oil majors’ petrol. Divulging what these are is a good start. But it doesn’t tell you a lot about how much progress that company is making, or needs to make, in bringing its emissions down. And it doesn’t help if you want to compare the climate profiles of wider stock or bond portfolios.

That’s where degree warming metrics come in. If they really took off, these could play a role akin to food labelling for diet-conscious consumers wary of sugar and fats. The objective, for Carney and his peers, is to pitch up in Glasgow with a metric that allows investors to read whether a company’s carbon footprint is consistent with a world where global warming is limited to appreciably below 2 degrees Celsius above pre-industrial levels. Those that aren’t would have a powerful incentive to buck up their ideas.

In general, degree warming metrics try to construct an appropriate benchmark level of emissions against which to judge individual companies. A report last month by Generation Investment Management’s David Blood shows one way they are put together. Say that the planet can only afford to emit another 1,000 gigatonnes of carbon to prevent warming of over 2 degrees Celsius, equivalent to less than 30 years based on current annual emissions. Degree warming metrics divide this budget into different regions, different industry sectors, and sometimes even different countries, and then create a yardstick against which to compare a company’s actual emissions. Blood’s report uses the example of a firm with a benchmark figure of 1.7 million tonnes (0.0017 gigatonnes), but emissions of 2.38 million tonnes. That company therefore overshoots its allowed budget by 40%.

To make this output more user-friendly the scenario compilers then apply a final twist. They ask what would happen if everyone in the world exceeded their carbon budget by the same proportion. Overshooting the 2 degrees Celsius benchmark by 40% means an extra 400 gigatonnes in the atmosphere. To convert that into an extra increase in temperature, warming metrics use the Intergovernmental Panel on Climate Change’s estimate that each extra gigatonne of carbon dioxide adds an extra 0.000545 degrees Celsius to warming. Multiplying 400 gigatonnes by 0.000545, the upshot is an extra 0.2 degrees Celsius over the 2 degrees Celsius limit – or a company warming profile of 2.2 degrees Celsius.

If each firm had one such figure, it would be genuinely useful. Unfortunately, what should be a killer app has similar potential flaws to ratings that purport to show how good a company fares on the environmental, social and governance front. While the end product is beguilingly simple, the calculations and assumptions are far less so.

For one thing, Blood identifies seven different metrics – by Arabesque, the Carbon Disclosure Project and World Wildlife Fund (CDP-WWF), Lombard Odier, MSCI, the Paris Agreement Capital Transition Assessment, Transition Pathway Initiative, and S&P Trucost. All have different things going on under the bonnet. Some approaches, such as those used by MSCI and CDP-WWF, use a different model to arrive at their warming score, a process which Blood’s report says has its merits but which can leave more room for error in the calculation process.

Then there’s data. Only 63% of companies in the MSCI All Country World Index even disclose Scope 1 and 2 emissions. A mere 37% divulge Scope 3s. Some methods deal with this pretty big data shortcoming by guesstimating these Scope 3 emissions; others just leave them out entirely.

Unsurprisingly, this had led to some pretty discordant outcomes. According to France’s Louis Bachelier Institute, S&P Trucost’s methodology awarded French waste and water company Veolia an implied temperature score of over 5 degrees Celsius, while CDP-WWF saw it as more like 2 degrees Celsius. The institute identified even more temperature warming methodologies – 13 in all – and found little consistency or correlation across the results. The big problem is that less sophisticated investors may fail to interpret these metrics with sufficient care.

Blood may have a solution. He is currently engaged in a grand, industry-wide consultation to try to agree on harmonised standards for company emissions data, and to fine-tune warming methodologies. Other investors are stepping up to the plate too. BlackRock’s sustainable research team sees improving degree warming metrics as a top priority.

Yet there’s still a potential issue. Companies that already use one warming metric may be reluctant to endorse a harmonised one that implies they have more of a problem. And the different providers won’t want to surrender a potential money-spinner too readily. Don’t bet on the green firmament arriving in Glasgow with all the wrinkles ironed out.


Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at and follow us on Twitter @Breakingviews and at All opinions expressed are those of the authors.