The article was amended to correct the proportion of DAX 30 constituents with climate targets.
Major stock benchmarks in the UK, US, Canada and Japan have received a temperature score of 3°C or more, making them the worst climate performers among G7 countries.
According to analysis by the Science Based Target Initiative (SBTi), the FTSE 100, S&P 500, SPTSX 60 and NIKKEI 225 are all on a “dangerous temperature pathway” of 3.1°C, 3°C, 3.1°C and 3°C respectively – significantly overshooting both the Paris Accord’s 2°C global warming limit and its aspirational 1.5°C target.
SBTi is a collaboration between the World Resources Institute, WWF, CDP and the UN Global Compact. It works with companies and investors to develop decarbonisation strategies aligned with current science.
The overall temperature scores were calculated based on the number of index constituents with emissions reduction targets validated by the SBTi or submitted to carbon disclosure body CDP. Companies with neither were given a default temperature rating of 3.2°C based on global climate pledges.
‘Today’s data shows that passive investing is funding companies that are yet to respond to the Paris Agreement goals’ – SBTi
While indices in other G7 countries fared better, they still fell short of expectations under the Paris Agreement. Germany's DAX 30 led the pack with a score of 2.2°C, attributed to having the highest number of constituents with emissions targets (50%), followed by France’s CAC 40 and Italy’s FTSE MIB, both at 2.7°C.
Researchers noted that while the UK has committed to reduce emissions by 78% by 2035, in line with its ambitious 1.5°C national climate pledge, only 6% of FTSE companies have publicly announced decarbonisation targets – the second lowest among the G7 countries, after Canada.
The findings are significant for passive investors, which comprise more than 40% of the US fund market and own an estimated $15tn in assets globally, said SBTi. “Today’s data shows that passive investing is funding companies that are yet to respond to the Paris Agreement goals by mitigating their substantial climate risks,” it added.
There has been an uptick in European asset owners adopting low-carbon benchmarks, many of which are based on new regulatory definitions. Swiss Re, the Church of England and Swedish pension fund AP2 are among those to have switched to Paris-aligned or ESG-based benchmarks.
While seemingly slight, scientists say that there is a world of difference between the physical impacts of climate change at under 1.5°C and 2°C of warming, the two stated targets of Paris. It is estimated that 2°C could expose tens of millions more people worldwide to life-threatening heat waves, water shortages and coastal flooding, compared with 1.5°C.
The report comes as G7 leaders prepare to meet in the UK for a key summit, having already backed mandatory climate reporting based on the TCFD framework and new global tax rules in a series of preparatory meetings last week.
Lila Karbassi, SBTi Board Chair and Chief of Programmes at the UN Global Compact, said: “This report highlights the urgent need for markets and investors to deliver on the goals of the Paris Agreement. As the G7 meets this week, Governments must go further to incentivise ambitious science-based target setting.”
While SBTi’s temperature scoring methodology has gained some traction since its 2015 launch, with over 1,000 companies said to be working with the initiative, some of its former partners have raised concerns about alleged conflicts- of-interest and misalignment with climate science.