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SUSTAINABILITY IN FOCUS
January 2021

Assessing Corporate Alignment With the Paris Accord

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Climate assessments need to be science-based

Ever since the previous Bank of England governor Mark Carney's speech in 2015, which introduced the notion of climate-related risks, investors have scrambled to integrate this issue into their investment decisions. The big question is: how can companies and investors can align with the Paris Climate Accord based on scientific considerations. The requirements and ability of companies to do that is dependent on scientific advances and government policies to manage the energy transition. Moreover, a lot of assumptions need to be made to calibrate their models accordingly. However in the end, investors need a compass to take climate considerations into account for two reasons. Firstly, the approach helps to identify weak companies, which are likely to be strongly affected by physical, regulatory or transition risks that will have a negative impact on their profits and cause assets to strand. Secondly, we can find opportunities among those companies that have already integrated the climate dimension into their business models in order to gain market share and be tomorrow's winners. Therefore, assigning a temperature path is crucial.

Carbon reduction efforts depend on the temperature goals

We believe that each sector has its role to play in the climate transition. However, the carbon reduction efforts that need to be undertaken to align with the Paris Accord depends on the nature of each business and its geographical location. Our data providers supply the carbon reduction requirements that need to be made for each sector and country depending on the temperature scenario.

Checking companies’ carbon reduction objectives

In a second step, we analyse the carbon reduction objectives formulated by the management of each company. These targets are then compared with the requirements under each temperature scenario. Therefore, we can assess whether the objectives are ambitious enough to align with the Paris Accord or whether they fall short with these.

Carbon emission past practices

Having ambitious objectives is a necessary, but not a sufficient condition. This is why we need to confirm the companies’ ambitious targets by comparing them with the results that were achieved in the past. Climate change is not a new issue, as such, a company with a responsible climate policy should have been setting up strategic directions years ago. Past observations allow us to see whether the current carbon objectives are realistic and if align with a consistent trajectory pathway and a temperature scenario. The progress will of course be monitored over time and the model needs to be updated over time.

What do clients get?

Of course it is not with perfect certainty that we can estimate a company's climate trajectory over the next few years. But we can certainly confirm that we have taken into account all the necessary ingredients to mitigate the risks stemming from the climate transition. We believe that a company that has, 1) Proven it is capable of reducing carbon emissions over time 2) Displays in its strategy a real commitment to continue on this transition pathway, and 3) that is in line with the efforts to be made to comply with the Paris Accord, is likely to be better positioned for a low-carbon future. Once we have done this quantitative assessment, an in-depth fundamental analysis is advised to understand the company's strategic thinking in relation to the energy transition. Finally, to select the future leaders of tomorrow, this analysis needs to be complemented with an assessment of their ability to generate future cash flows.

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