Definitions and overall approach

How do you define Paris alignment?

We use two main definitions of Paris alignment:

  • Institution view: holistic commitment to make investments and overall organizational practices consistent with the achievement of the Paris goals, through the integration of Paris targets across the investment decision chain, from strategy and sourcing through to due diligence. Institutional engagement must be comprehensive across multiple business areas, able to deliver on a long-term horizon, and ambitious in the scale of action taken. Ultimately action should translate in changes in the real economy – through the realignment of portfolios and investment with temperature trajectories compatible with Paris.
  • Real economy view: the consistency of trends in emissions and investment observed within key impact sectors with Paris-aligned temperature trajectories.

Alignment alone is not sufficient to accelerate progress towards Paris, i.e., it is not enough to shift all investments into tech and renewables stocks and bonds: there is a set of specific technologies and subsectors that need new investment to enable net zero in hard-to-abate industries.

How is the dashboard aligned with the Framework for Sustainable Finance Integrity?

The Tracker and the Framework for Sustainable Finance Integrity have been developed in parallel. The goals of the Framework are to take on considerations from both public and private actors in the financial system to create an overarching framework to deliver results, and identify minimum and leadership benchmarks of success.

The Tracker assesses progress from a bottom-up approach, looking at data that is available now. In its beta version, the Tracker is focused on a broad set of private sector actors.

We have also worked to align the methodologies in a way that strengthens both initiatives. For example, early leaders are identified by the Tracker, which helps the Framework to understand what benchmarks might make sense for leadership at this time. Similarly, the Framework’s benchmarks can feed in the assessment of the response scores for the various entities as we update the Tracker’s methods looking forward.

How does aggregation work? Does the Tracker allow actors to achieve a "perfect" score and conceive how this contributes into an ideal system?

We use a 0-100 scoring system to determine the level of response within the “Target” and “Integration” dimensions. The response score is determined by looking at underlying data and what aspect of alignment is considered. Answers are ranked from low to high (or allocated to different “shades of green”) based on general qualitative considerations, flexible enough to be applied to very diverse indicator categories. Those favour:

  • Transparency: Non-transparent (low) to Transparent (high)
  • Concreteness: Commitment (low) to Action (high)
  • Climate focus: Broad sustainability (low) to Climate-specific (high)
  • Comprehensiveness: Incomplete/sectoral metrics (low) to Comprehensive metrics (high)
  • Ambition: Low to high

A “perfect” score of 100 for a specific institution would mean that the organization is deploying the entire portfolio of instruments available within a dimension and using these instruments transparently and ambitiously. This is the ideal case, currently still non-existent. This is the reason why we are also tracking the score of the early leader, defined as the highest score in a specific institution group, which provides a sense of what is achievable now.

How much "expert judgment" is involved when assessing institutions against the different indicators?

We have attempted to be as transparent and rigorous as possible with what and how we are presenting the findings, which are based on both quantitative and qualitative assessments. Our full 65-page methodology goes into great detail about how we classified institutions across indicators and how the scores were generated from these indicators. In all instances, we are working to assess what is measurable, and have used average scores across indicators to generalize the dimension-level scores so as not to weight one indicator above another. This methodology has been peer reviewed by leading experts in climate and net zero finance, though we continue to welcome feedback on how we can improve both our data sources and our methods in next iterations.

We consider the approach so far defined as a “living” methodology. The idea is to continuously update and improve this methodology as new data becomes available and new approaches are developed.

Dashboard scope

Is there a way to make differences between regions visible in a global dashboard or would we need to have regional dashboards as well?

Yes. We would like to create a global dashboard and national dashboards incorporating country-level measures of investment needs, etc., to the extent possible.

How do you define the institution types used to classify institutions in the dashboard?

We currently cover private institutions. The approach to determining institution categories was based on a matrix of key properties of different types of investors, including their role as an intermediary for asset owners, preference for primary or secondary markets, appetite for risk, preference for debt or equity investments, length of time horizon, and stage in the investment life-cycle. Broad, recognisable categories were used where possible, with some smaller categories reflecting single asset class investment firms. In future iterations beyond the beta dashboard, categories could be modified or merged depending on feedback about what is most helpful for users.

Would the Tracker eventually be able to drill down at an entity level and see all metrics for a specific institution? Does the Tracker highlight standout performers vs bad actors?

Generally, institution-level data is not the focus for the beta Tracker due to proprietary data issues, but it is something we are considering for the next stage of development.

Instead, aggregated actor-type information (e.g. asset managers vs corporations) is presented. To help highlight best practices, we do name some of the early leading actors within institution categories and dimensions.

Currently we show 2 levels of information for various institutions categories:

  1. type of data available classified into “shades of green,” which catalogue the strength of Paris commitment within the indicator; and
  2. summary score based on a weighted average of different entities individual levels of commitments, compared with the score of the early leader.

We believe this provides useful information as to where and how action needs to be further pushed, or where things are already progressing.

Are there any plans to link / show causality in the data and indicators that connect a) Targets, to b) Integration, and c) Flows?

Currently the dashboard only tracks progress within the three dimensions and 18 indicators (and underlying sub-indicators) without looking at links across them. Causality is something we could look at going forward and, as we start to track over time, in relation to individual institutions, since targets and integration can be leading indicators of future action resulting in flows. However, some indicators can also be proxies for action already taking place that would be very difficult to track in terms of the link through to project level investments.

How comprehensive is the data? Do you cover recent 2021 data? How frequently is data updated? Will the Tracker be able to show changes over time?

Data is available and covers information (e.g. announcements) through August 2020.

Real economy data has been updated with the publication of the most recent UK carbon budget.

In the next iteration, we hope to automize data capture to update existing datasets. This should also hopefully make sure that data, or at least some of the data, can be updated more frequently as it becomes available. We are open to exploring data sharing arrangements and partnerships that would allow for faster and more regular updates of underlying data.

We also hope to expand access to data through new data partnerships. We learned a lot from the UK beta, which we can apply at the next stage as we better focus our data collection and processing efforts.

Is this Tracker mainly focusing on finance to mitigation and not adaptation?

Some climate resilient investments and adaptation investments are tracked within flows. However, owing to barriers to reporting and accurately capturing adaptation investments (see CPI’s Global Landscape of Climate Finance 2019), the vast majority of tracked primary finance is for mitigation. Furthermore, the criteria applied in our tracking methodology for an investment to count as climate finance mean that even adaptation investments should be able to demonstrate that they ‘do no harm’ to mitigation by raising carbon emissions. This approach is commensurate with the net-zero pathway modelled by the Climate Change Committee, which provides investment need benchmarks in the real economy. It factors economic and social changes needed to adapt to the effects of ongoing climate change.

Physical risk considerations are also embedded within climate risk due diligence practices, although a distinction is not explicitly made between transition and physical risks due to lack of granularity in underlying data currently used.

Sources and assessment methods

How do you assess targets? Do you have datasets assessing their alignment with the goals of the Paris Agreement?

We currently only have data stating whether there is a mitigation target, whether it is transparent, and whether it covers scope 3 emissions. We do not yet assess the ambition of the target itself, though we assess action and integration separately.

CPI is expanding the amount of information available. In a parallel project, we are collecting additional information on individual private financial institutions’ commitments to net zero, emission reductions, etc., as part of a project being conducted for the COP26 team, mapping the details of the commitments of at least 100 global institutions.

Additionally, another project developed by an advisory council of leading financial organisations and civil society, The Framework for Sustainable Finance Integrity, outlines a draft set of guardrails to foster integrity in the financial system’s pathway to net zero.

Both initiatives will be gradually integrated in the Tracker.

Targets are sometimes set only for part of a portfolio. How do you deal with this?

We are categorizing/disaggregating entities at the same level at which information is being supplied. If a target of a mapped institution is only sectoral, the institution’s level of response scores lower. Unless otherwise specified, targets are assumed to apply to the entirety of an entity’s portfolio. To better address this issue in the future, we may want to make sure that information is retained on whether an action in the original dataset was tracked at the corporate or branch level.

There is a general tendency to perceive net zero targets as only portfolio decarbonisation targets that won’t lead to achievement of net zero across the economy (in other words, divestment by one investor in an asset will be taken up as investment by another, therefore making no difference in emissions or action on the ground). A much broader view is needed to capture investment into climate solutions, avoided emissions, taxonomy alignment, etc. How does the dashboard capture this?

We agree, and we try to take a broad view drawing on data on various dimensions of alignment.

Under the “Institutions” view we track both commitments of decarbonisation (under the Target dimension) and investment in climate solutions (under the Flows dimension). We are also looking into portfolio decarbonisation data compiled, for example, by organisations such as FinanceMap using assessment tools from the 2° Investing Initiative (Flows dimension). Under the “Real economy” view we track instead historical emissions trends in key high-impact sectors, and how those compare with projected emissions under a net zero scenario.

While assessment of real economy flows is the ideal approach, there are many gaps in the data on real economy investment and flows. Right now, it is therefore also important to see what commitments are being made and how they are being implemented to understand how these actions may lead to financing in the future.

In next versions of the Tracker, we plan to progressively integrate new indicators of progress, particularly in the Flows dimension, that would be able to capture the multiples facets of alignment (e.g. distinguish between active and passive alignment). Passive alignment means not undermining the Paris Agreement, which is very different from actively contributing to the solution by, for example, investing heavily in essential technologies.

Under Integration you have several criteria on risk. How do they relate to alignment with the Paris Agreement?

They are included as part of qualitative analysis. We currently look at climate risk disclosure and integration of climate risk due diligence in internal operations. We assess only if they are either in place or not in place at the moment. This does not relate therefore to Paris alignment directly.

What data you include about GHG emissions reporting? How do you make a distinction on the level of quality of reporting?

For the institutions view, what we currently track is how financial entities are reporting on emissions. Here, we use data from PCAF and TPI to establish which institutions, amongst those reporting on emissions, are disclosing emissions which have been externally verified by a third party, or that use verified standards for reporting.

For the Real Economy view, we also replicate best available data on emission trends. For the UK, this came from the Climate Change Committee’s 6th Carbon Budget.

Can you elaborate on how you’re tracking engagement? Specifically, how do you “count” alignment of financial institutions that are actively engaging with the companies they own. How would active engagement be captured in the framework? Is it just shareholder votes or are other metrics used?

We look into the data and methodology of Climate Action 100+, Principles for Responsible Banking, Principles for Responsible Investment and others. There is an important distinction between commitment to engagement vs. enacting engagement, and they are treated differently.

What sources of financing do you include under ‘investments’?

The aim is to be as comprehensive as possible. So far on Flows we have data on:

  1. low carbon primary investment data sourced from CPI’s Global Landscape of Climate Finance;
  2. green lending from BNEF; and
  3. green bonds data from BNEF, Climate Bonds Initiative and others.

Many sources of finance in various sectors are not included due to lack of data. We welcome any suggestions on additional investment flow data that could be incorporated in the future. For example, we gathered data on fossil fuel power generation primary investment and investment into fossil fuel companies, which are not shown in the beta dashboard owing to significant gaps in coverage across institution categories.

Do you track public finance? Could the Tracker be used to map progress against the commitment for developed countries to provide $100bn in climate finance to developing countries?

We currently do not cover public actors, or the finance they provide, within the institutions view of the Tracker. We would like to add this in the next iterations.

We do however track information on public finance flows under the Global Landscape of Climate Finance. Public investments are therefore covered in part within the Real economy view, if they feature in our Global Landscape data. That also covers direct investments in renewable energy projects and government subsidies for electric vehicle purchases. However, due to a lack of publicly available data detailed enough to be able to allocate to particular impact sectors, it does not systematically track spending within public budgets on climate objectives.

As regards the 100bn commitment, there are still definitional issues that need to be sorted out on a political level, which is why we focus on actual financial flows in our work (from developed to developing countries, covering both public and private sources). This gives an understanding of the scale of finance flowing, without being too narrowly related to the 100bn and its political issues. We could certainly highlight these flows, provided that the definitions are clear.

Do you show the difference between “green” and “transition” investment in the flows?

At the moment, we track financial flows labelled as ‘green’ and compare those with estimated needs. Better benchmarks need to be developed and integrated to consider where the line may be drawn between different shades of green, for example, Paris compliant vs. transition finance.

Do you measure alignment of financial flows / investments with Paris?

For the Real economy section of the Tracker we do compare the level of historical emissions and investment flows with projected levels of emissions and investment needs compatible with Paris goals in key impact sectors.

Alignment of flows is not provided in the Institutions section of the dashboard. CPI recently published work on the global power sector to test a methodology to assess alignment of new investment at the country level using carbon intensity data and IEA scenarios, but the data is not currently included as it only covers a single year. In other sectors, purely quantitative methodologies may not be possible in the short term and further work to classify investment may need to compare against multiple reference points to provide a balanced sense of progress. Such assessments could be integrated to the Tracker over time and Tracker member network members may work to identify priority research areas.

Will the Tracker capture flows / investments into solutions in listed equity portfolios?

Yes, to the extent this information is available.

Do you track insurance underwriting?

Not at present.

Have you considered tracking temperature scores of financial actors and companies?

We do use portfolio alignment based on the assessment of the alignment of climate-exposed portions of invested portfolios, with different decarbonization pathways. While we do not report on the specific temperature trajectory, we do highlight whether that trajectory can be in aggregate considered aligned (below 2C) or not. We are open to consideration whether to add further level of granularity or additional datasets that can inform the key research questions the Tracker aims to tackle and welcome recommendations and partnerships.

What information do you include on portfolio alignment?

Portfolio alignment approaches currently available look into the climate relevant parts of investor portfolios and assess the portfolio’s degree of alignment with decarbonization pathways.

Currently the data shows that there are 10 times as many institutions whose share of portfolios exposed to climate-critical sectors is misaligned with the Paris Agreement as there are aligned institutions. The institutions with misaligned portfolios are usually larger than those with aligned portfolios.

Large data gaps are likely in less transparent markets – how would the dashboard work for a developing country?

As we move forward, we will provide information about the share of assets / institutions currently covered in the analysis in the context of reference. This should give a sense of the level of transparency or degree of response in the overall market and highlight needs for political action in the target country. This was not possible until now due to issues in data on total assets under management which requires further quality checking. AUM changes all the time in response to changes in client base and of course the valuation of the assets.

Data access

How does CPI deal with data licensing?

At present we use publicly available data or subscription data that then needs to be presented in an aggregate form.

Is the underlying database available to download or access?

Currently we are considering options for downloading the processed data underlying the graphics seen on the data dashboard. We are unable to share large volumes of underlying data due to our data licensing terms. However, consulting the methodology document can indicate which data sources are used to construct each indicator under targets and integration, many of which are free to access.

NZFT Member Network

How much time do members need to dedicate to contribute?

Currently, one meeting per quarter is requested at minimum. Once the data dashboard further develops, we will come back with a more detailed plan for membership activities and time commitments. In the meantime, we welcome any feedback.

Elements under consideration for deeper collaborations include:

  • Help to strengthen the “living methodology,” and make sure that data is correctly used for the scoring. Thematic working groups could be constituted to have tailored discussions on different parts of the dashboard scoring system.
  • Define data sharing options and arrangements for keeping data up to date/expanding such as APIs
  • Prompt analytical work drawing on the Tracker data and other contextual info, scenarios
  • Support fundraising for next iterations of the dashboard
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