Yet all of these efforts, some pursued for years, have barely budged the temperature of its overall asset pool. From the start of 2018 through the end of 2019, Axa’s holdings cooled by just 0.2°C to 2.8°C. The warming potential metric for 2020 will be published by June; Axa declined to provide guidance.
Decoene said the slight reduction followed divestments from the most carbon-intensive sectors, with the average warming potential of companies on its exclusion list at 4.6°C. Going forward, Axa is committed to reducing the carbon footprint of its equity, corporate debt and real estate investments by 20% by 2025, she said.
Calculating the implied temperature of a portfolio is a relatively novel concept, and there’s no consensus on the best way to do it. Some critics question whether it’s even possible to make an accurate forecast.
A report co-authored last year by David Blood, who started sustainable investing firm Generation Investment Management with Al Gore, found at least seven different methods of measuring portfolio alignment from firms including MSCI Inc. and a unit of S&P Global Inc. That may lead to investor confusion, and even increase the risk of greenwashing, "as the metric could be adjusted to fit different purposes," according to the paper.
Axa collaborated with a Swiss fintech company called Carbon Delta, which has since been acquired by MSCI, to develop a methodology. Axa was more open to experimenting with climate metrics than many of its global peers, in part because of pressure from the French government. There’s also growing interest among the company’s clients to show how their businesses stand up next to the goals of the Paris accord. The process is complicated.
An investor’s portfolio has the same warming potential as everything inside of it. That means Axa needed to determine just how much it believed each of its assets would increase global temperatures by the year 2100. Climate scientists do this type of modeling using what’s known as temperature pathways, projecting different scenarios for the coming decades based on assumptions about greenhouse gas output. Will society’s adoption of electric vehicles go faster than expected? Will coal power plants continue operating for longer?
Axa needed to form the same assumptions about the future emissions associated with everything in its vast portfolio, from U.S. treasuries to Nestle SA. To do that, it needed reliable data on emissions—both those produced directly by a business or a country, as well as those created by customers using the products of a company whose shares it owns. Emission-reductions plans, such as net-zero pledges or corporate investments in green technologies, as well as relevant state-level commitments to cut greenhouse gases, also are taken into consideration.
With all that information, Axa’s portfolio can be assessed under the same sort of temperature pathways used by scientists to estimate how much carbon dioxide can be emitted by the economy before the planet breaches various warming thresholds. That’s how Axa calculates its portfolio score, based on the size of its holdings.
At a company level, the results of this process can be surprising. Even companies making bold commitments to reduce emissions can heat up a portfolio. Amazon.com Inc. plans to be carbon neutral by 2040, for example, and yet MSCI ESG Research LLC ascribes a warming potential of 3.9°C to the retail giant. Apple Inc.’s 2.9°C warming score stands at odds with its pledge to zero-out emissions from its supply chain and products by 2030. By that year, Microsoft expects to be carbon negative, meaning it plans to be removing greenhouse gas from the atmosphere on balance; it gets a 2.1°C score.
And giant tech companies tend to be forthcoming with emissions data, which isn’t the case in other sectors. A new report by the Transition Pathway Initiative determined that only 16 of 111 large publicly-listed industrial companies, such as miners and steelmakers, publish emissions projections that align with the Paris Agreement.