Net-zero targets for investment portfolios: An analysis of financed emissions metrics

Alastair Fraser and Tanya Fiedler

Energy Economics, 2023, vol. 126, issue C

Abstract: Financial institutions and investors aligning their investments with the objectives of the Paris Agreement, implementing the Task Force on Climate Disclosure recommendations, or seeking to reduce financial risks arising from the transition to a low-carbon economy, frequently measure, report, and set reduction targets for the emissions associated with their investments—called their ‘financed emissions.’ In this paper, we analyse the relationships between reductions in financed emissions and reductions in physical atmospheric emissions. We find that, unlike country-level GHG targets, reductions in a portfolio’s financed emissions has little direct relation to changes in physical emissions; over a 95% reduction in financed emissions can be achieved using industry-standard methods even while physical emissions from a portfolio’s companies are increasing. This creates a substantial risk of misaligning portfolios – and investment decisions – to climate mitigation efforts and net-zero commitments. We analyse the different financed emission definitions and targets currently in use and suggest alternative means by which investors can credibly align their portfolios with the transition to a low-carbon economy.

Keywords: Climate change; Net-zero; Low-carbon transition; Transition risks; Finance (search for similar items in EconPapers)
JEL-codes: G23 G28 Q48 Q5 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:126:y:2023:i:c:s0140988323004152

DOI: 10.1016/j.eneco.2023.106917

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