A new metric quantifying portfolio warming potential is designed to give investors a readily grasped reference point similar to the global warming potential (GWP) scale for environmental emissions. It’s part of a package of analytical tools that investment advisory firm MSCI has launched to identify and track asset exposure to climate risk, aligned with the steady adoption of the Task Force on Climate-related Financial Disclosures (TCFD) by global financial institutions.
Drawing on national and company data, financial impact modelling and geospatial coordinates of more than 600,000 assets, the tools calculate the potential risk to asset value that climate-related costs may pose. That includes: costs related to national climate policies; transition costs as companies prepare for or fail to adjust to an emerging low-carbon economy; and financial costs related to assets that are physically vulnerable to extreme weather.
Portfolio warming potential is a complementary gauge of a company’s contribution to climate change that could be of particular interest to investors with ESG (environmental, social, governance) compliance imperatives. It computes the total climate-related impact of a company’s activities and assigns a temperature value to express how those activities align with the target to restrain the global temperature to no more than an 1.5 degree Celsius increase.
“Managing climate risk has become an increasingly important tenet of the investment process along with the ability to measure the impact of climate change and build portfolios resilient to climate risk,” says Remy Briand, head of ESG with MSCI. “Investors are now publicly expressing a desire to take action and address the urgent reality of climate change themselves, and they are also urging others in the investment industry to do so.”