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EU backs open source tool to help investors reach Paris climate target

The 2° Investing Initiative (2dii) and Beyond Ratings have launched an EU-backed open source tool which they say can help investors become Paris-aligned and assess their risk of stranded assets.

The Climate Tech Compass, which was developed with the support of EU climate innovation body Climate-KIC’s Demonstrator Later-Stage Innovation programme, allows users to roadmap the investments, energy capacity, and emissions needed in order to achieve the 2°C target across 101 different countries. It was launched at an energy transition event in Paris.

According to the creators of the tool, it can help institutional investors select companies whose technological mix and emissions pathways are best aligned with a 2°C target. 

Through the Climate Tech Compass an investor can identify the alignment of a particular sector with its country’s 2°C-aligned carbon budget, and assess the reductions that would need to be made.

It covers eight high-emission sectors where, the firms say, technological change and greenhouse gas reductions will be critical: automotive, aviation, shipping, power generation, cement, steel, agriculture, real estate. 

Each sector has a specific transition pathway, or technology roadmap, for it to contribute to the Paris Agreement goals, as well as pathways for different degrees of warming. 

Through the Climate Tech Compass an investor can identify the alignment of a particular sector with its country’s 2°C-aligned carbon budget, and assess the reductions that would need to be made. This can then be compared with current company trends to highlight the risk of stranded assets, for example. An investor can also benchmark metrics such as the carbon intensity of a specific company against the sectoral carbon intensity of the sector of that company in a country to measure the alignment with a 2°C scenario.

The firms said the Compass also helps governments design their Nationally Determined Contributions (NDCs) to the Paris Agreement and adapt to the impacts of climate change. Current NDCs have been shown to lead at best to a +3°C climate evolution.

The tool combines 2DII’s database of physical assets with Beyond Ratings’ Climate Liabilities Assessment Integrated Methodology (CLAIM), which analyses country climate strategies, assesses sovereign bond climate risk exposure, and measures the alignment of government bond portfolios with climate targets.

Getting AXA’s portfolio down from its current alignment with 3.1 degrees was going to be “a very big stretch” – Sylvain Vanston, AXA

No investors have officially endorsed the tool yet, but Beyond Ratings and 2dii are inviting feedback.

Last week, AXA became one of a string of new signatories to the UN-backed Net Zero Asset Owner Alliance, which sees members commit to carbon neutral investment portfolios by 2050.

Sylvain Vanston, Head of Climate and Environment at AXA Group, said: “After years of measuring, now we have a target that we have to reorganise ourselves around. Honestly, we don’t really know how we’ll get there.” 

He said getting AXA’s portfolio down from its current alignment with 3.1 degrees was going to be “a very big stretch” when its investment universe is not Paris-aligned. “AXA invests €50bn annually and…it can’t all be green bonds or organic food”. 

Corporate lobbying was “undermining investor interests and creating more risk for all of us within the US and EU” – Sagarika Chattergee, PRI

Olivier Irisson, Chief Operating Officer and Head of Financial Operations at Natixis parent Groupe BPCE, said he had been frustrated by the financial sector’s approach to transition so far. He called out green bonds specifically, calling them “meaningless in terms of impact” and of “negligible” size.

He said: “We must look at the global portfolio, for which we need metrics and figures.”

During one panel discussion at the event, called ‘Financing the Transition’, Sagarika Chatterjee, Director of Climate Change at the Principles for Responsible Investment, said corporate lobbying was “undermining investor interests and creating more risk for all of us within the US and EU”.

Sagarika Chattergee, PRIShe said: “Today the US government – after much lobbying by Exxon and others, we suspect – is going to curb shareholder rights, which will make it very difficult to exercise active ownership with those oil and gas companies and to prove that engagement with companies works.”

She was presenting the PRI’s Inevitable Policy Response work. 

“I think the greatest risk we see is that governments are leaving this so late. So what we’re trying to do with the Inevitable Policy Response work is give a way we can factor this in.”

The next report to come out of the project, on December 9, will look at the impacts government climate policy will have on equities, on a sector level. 

It comes as Banque de France said it would subject banks and insurers to climate change stress tests next year. 

“We will run climate stress tests for French banks and insurance next year,” governor Francois Villeroy de Galhau said.