Inconsistent depiction of emissions due to selective reporting
In the race to combat climate change, financial institutions and companies are adopting practical strategies and standards to align their investments and operations with net-zero emissions, in line with the goals of the Paris Agreement. This shift is transforming the way asset managers, issuers, and evaluators approach decarbonization and Paris alignment.
What these terms entail
Decarbonization pathways are structured approaches that companies and financial institutions follow to reduce greenhouse gas emissions over time, aiming to achieve net-zero emissions by mid-century (usually 2050). These pathways include interim targets, transition plans addressing Scope 1, 2, and key Scope 3 emissions, and mechanisms for engagement, financing, and performance monitoring.
Paris alignment means ensuring investment portfolios and corporate practices are consistent with limiting global warming to well below 2°C, ideally 1.5°C, as set by the Paris Agreement. For investors and asset managers, this involves pushing portfolio companies to set net-zero targets, disclose emissions, and transition business models accordingly.
Current real-world state for key stakeholders
Asset managers and institutional investors are shifting from simple divestment of high-emitting sectors to investing in transformation. They are focusing on "improver" companies—those with credible plans to decarbonize—achieving significant emissions reductions while maintaining returns.
Issuers (companies) are increasingly expected to develop and implement credible transition plans that cover all relevant emissions scopes (Scope 1 direct emissions, Scope 2 indirect from purchased energy, and material Scope 3 value-chain emissions). Managing particularly challenging Scope 3 downstream emissions is becoming critical.
Evaluators and rating agencies (like MSCI, Sustainalytics) assess company and portfolio alignment with climate goals by analyzing emissions data, target robustness, transition strategies, and adherence to standards such as the Science Based Targets initiative (SBTi). The SBTi recently launched a Net-Zero Standard for the financial sector, enabling institutions to set targets based on clients’ net-zero alignment rather than direct financed emissions alone.
Finance innovations and approaches are creating green-labelled funds, sustainability-linked loans, and green insurance products that incentivize decarbonization, reduce exposure to non-aligned investees, and integrate emission reduction performance into financing terms.
Summary of practical implications
The shift towards decarbonization pathways and Paris alignment involves detailed emissions accounting, target setting, financial innovation, and standardized evaluation to drive real economy emissions reductions consistent with net-zero goals.
| Stakeholder Group | Current Practice Highlights | Key Expectations / Tools | |-----------------------------|----------------------------------------------------------------------------------|----------------------------------------------| | Asset Managers | Shift from divestment to backing transition-ready companies; climate engagement | Portfolio decarbonization, transition plans, Paris alignment targets, emissions intensity reductions[1][2] | | Issuers (Companies) | Develop net zero targets, comprehensive transition plans, manage Scope 3 emissions | Scope 1, 2, and material Scope 3 reduction plans; engagement by investors; transparent reporting[2][3] | | Evaluators/Rating Agencies | Use new standards (e.g., SBTi Net-Zero Standard for finance sector) to assess alignment | Emission inventories, deforestation risk, fossil fuel policies, transparency and performance metrics[4] | | Financial Innovation | Green bonds, sustainability-linked loans, incentives for emissions reductions | Products tied to climate goals, reduced exposure to high emitters[3] |
In real-world terms, this means investors and financial institutions are actively engaging with and financing companies that demonstrate credible transition potential, while evaluators increasingly adopt rigorous, standardized methodologies that emphasize transparency and accountability aligned with the Paris Agreement[1][2][4]. Robust frameworks now also require addressing complex indirect emissions (Scope 3), mandating broader corporate climate leadership[3].
- Financial institutions and companies are adopting decarbonization pathways, which include interim targets, transition plans addressing all emission scopes, and mechanisms for engagement, financing, and performance monitoring, in order to align their investments and operations with net-zero emissions by 2050, as part of the goals set by the Paris Agreement.
- Issuers (companies) are increasingly expected to develop and implement credible transition plans that cover all relevant emissions scopes, including manageable strategies for particularly challenging Scope 3 downstream emissions, to demonstrate their commitment to climate goals.
- Evaluators and rating agencies, such as MSCI and Sustainalytics, are using new standards like the Science Based Targets initiative's Net-Zero Standard for the financial sector to assess company and portfolio alignment with climate goals by analyzing emissions data, transition strategies, and adherence to standards, which help create green-labelled funds, sustainability-linked loans, and green insurance products that incentivize decarbonization and reduce exposure to non-aligned investees.
