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Open Access Publications from the University of California

The Sixth Carbon Metric: A New Methodology for Climate Change Impact Investing


The purpose of this study is to evaluate the efficacy of a novel greenhouse gas (GHG) emission metric within the context of recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD) (TCFD 2017) for how asset owners and managers should account for the impacts of emissions associated with their investments and holdings. The goal of the metric is to incorporate requirements outlined by Paul Brest and Kelly Born in the seminal paper “Unpacking the Impact in Impact Investing” 1 into carbon metrics already recommended by the TCFD, including footprint analysis that adds and compares portfolios based on their associated Scope 1 and Scope 2 emissions 2 profiles.The new metric is designed to evaluate alternatively the directionality (slope) and velocity (rate) of carbon emissions reductions so critical to a market-based solution for addressing climate change. This study utilizes historical emissions and public equity security data to complete a cost-benefit analysis (CBA) on separate climate focused investment strategies and a common benchmark. The objective of the CBA is to determine which of the potential decisions for investments would lead to the best outcome, in terms of emissions reduction. This study assumes an initial investment of a hypothetical $1 billion ($1b) on behalf of a global pension scheme concerned about the long-term climate-related ramifications of their investments. This study finds that the use of a Smart Climate â approach leads to greater insight into the attribution of return performance and a total net benefit of carbon reductions (or impact) over alternative market approaches to investing for a low carbon future. In conclusion, this study finds that this new metric can be useful in assisting asset owners and managers in evaluating the total climate-related impacts of their investment decisions. In addition, this study also suggests that investors can achieve greater total impact by overweighting companies that score highly for how they are managing their climate change transition risk with regards to a business as usual benchmark.

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