November 2020

Case study | Capability story

Addressing climatechange throughESG integration
Transition Pathway Initiative

Challenge

Criteria

Solution

Investors needed a practical, easy-touse tool for them to assess companies’
preparedness for the transition to a
low-carbon economy and engage withthe companies in which they are invested.

Evaluate companies’ low-carbon
transition strategies against the goalsof the Paris Agreement, against therequirements of the Task Force on
Climate-related Financial Disclosuresand in terms of their overall positioning
for a low-carbon economy.

The Transition Pathway Initiative wasdeveloped as an asset owner-led
initiative, with partnership support
from FTSE Russell and the Grantham
Research Institute at the London
School of Economics to assess thequality of companies’ management ofclimate change-related risks andopportunities, and their carbon
performance.

The need
Under the 2015 Paris Agreement, countries have committed to limit increases in
global average temperature to less than 2°C above pre-industrial levels, with further
objectives to keep increases within 1.5°C of pre-industrial levels. National andinternational policy action presents both an investment risk and opportunity.
Transitioning to a low-carbon economy may affect company cash flows and profits
as well as result in “stranded assets”, reducing the value of carbon-intensive assets.
The GHG emission reductions set by the Paris Agreement will require considerable
effort and capital inputs from both the public and private sectors, and will have
major implications for individual companies and sectors.

What is the Transition Pathway
Initiative?
The Transition Pathway Initiative (TPI) is an asset owner-led initiative (currently
supported by asset owners and funds with over $22.5 trillion assets undermanagement and advice, as of 29 October 2020), in partnership with FTSE Russell
and the Grantham Research Institute at the London School of Economics thatassesses companies’ preparedness for the transition to a low-carbon economy.
TPI assesses the quality of companies’ management of climate change-relatedrisks and opportunities, and their carbon performance. FTSE Russell provides thedata that underpins the management quality assessment, and is a member of the
TPI’s Technical Advisory Group.

“The results show the valueof using high-quality andobjective indicators toassess company
management quality andperformance. They allow us
to differentiate between
companies, and to assess
performance and impact ina robust manner.”– Adam Matthews,
Co-Chair of the Transition Pathway
Initiative and Head of Engagement
for the Church Commissioners andChurch of England Pensions Board

Case study | Capability story

Objectives
To enable asset owners to take action on climate change through the publicdistribution of data and information on:–

The quality of companies’ processes for managing greenhouse gas (GHG)
emissions and the risks and opportunities related to the low-carbon transition–

The extent to which companies align their disclosures with the recommendationsof the Task Force on Climate-related Financial Disclosures (TCFD)–

Companies’ future carbon performances compared to two benchmarksi) the Paris Agreement’s international targets and national pledges andii) 2°C degrees

TPI methodology and application
The TPI was developed to complement existing initiatives and frameworks, byaligning with prevailing disclosure initiatives and with investors’ climate change andsustainability expectations. TPI assesses companies on two dimensions, namely
Management Quality and Carbon Performance. Management Quality evaluates
how companies manage their GHG emissions management and the risks andopportunities related to a low-carbon transition and is being aligned with therequirements of the TCFD. Carbon Performance measures companies’ current
and future carbon performance in comparison to the Paris Agreement’s targets
including 2 degrees.

The TPI provides:
–

–

–
–

A clear framework outlining
expectations of managers andcompanies from asset owners andmanagers
Identification of companies withrobust carbon management
systems and processes, andcompanies where further work is
required
Identification of companies whosebusiness models align with thetransition to a low carbon economy
A practical, easy to use tool for
asset owners to engage with thecompanies in which they are
invested

Investors can use the TPI assessments to evaluate companies’ low-carbon
transition strategies against the goals of the Paris Agreement, against therequirements of the TCFD and in terms of their overall positioning for a low-carbon
economy. The TPI can be applied in a variety of ways including developing
organisational climate change policy and internal processes, investment analysis
and decision-making, reporting and accountability, and engagement with asset
managers, companies and public policy.

FTSE Russell’s partnership with TPI
FTSE Russell is a data provider for TPI. FTSE Russell’s data on climate change
and corporate governance form the basis of TPI’s Management Quality framework.
Examples of the data points being used by TPI include:–

Climate change policy–

Financial costs of climate change risks–

Energy reduction targets–

Short and long term emissions reduction targets–

Remunerations for senior executives including ESG performance

FTSE Russell’s data on climate change and corporate governance are a part of
FTSE Russell’s ESG data model. FTSE Russell draws from international standards
to analyse the ESG Scores of over 8,000 securities and to identify companies withstrong or weak ESG practices.
In addition to providing data, FTSE Russell is also a member of TPI’s TechnicalAdvisory Working Group. In this capacity, FTSE Russell contributes to the evolutionof TPI’s methodology.

FTSE Russell

2Case study | Capability story

Aligning with the Task Force on
Climate-related Financial Disclosures
The Financial Stability Board’s Task Force on Climate-related Financial Disclosures(TCFD) has published recommendations for voluntary climate-related financial
disclosures, with a mission to enhance access to company-specific climate-risk
data. As of February 2020, financial firms responsible for assets of US$138.8 trillion
have backed these recommendations.
The TCFD recommendations enable companies to effectively measure and assess
risks while investors can make more informed investment decisions. The
recommendations focus on four core themes: governance, strategy, risk
management, and metrics and targets.
–

Governance: disclose the organisation’s governance around climate-relatedrisks and opportunities–

Strategy: disclose the actual and potential impacts of climate-related risks andopportunities on the organisation’s businesses, strategies and financial planning–

Risk management: disclose how the organisations identifies, assesses andmanages climate-related risks–

Metrics and targets: disclose the metrics and targets used to assess andmanage relevant climate-related risks and opportunities

Following the release of the TCFD recommendations in June 2017, FTSE Russell
worked with TPI to conduct a full review of its climate-related indicators in order toensure its methodologies and criteria are aligned. FTSE Russell now collects dataon these indicators for its universe of 8,000 securities. One of the key revisions to
FTSE Russell’s Climate Change research model was the addition of seven new
indicators, as shown in figure 1.

Figure 1. Integration of TCFD recommendations in FTSE
Russell’s climate change research model
Governance

Strategy

Risk management

Metrics and targets

FTSE Russell’s mainindicators:– Board oversight of climatechange issues

FTSE Russell’s main indicators:– Describe climate change as arelevant risk to the businessand discloses time horizon– Impact of climate-related risks
on strategy and financial
planning– Financial quantification of
cost associated withclimate-change– Climate scenario planning(2 degree and other) and thebusiness impacts

FTSE Russell’s mainindicators:– Climate-related risk
management procedures– Adaption and mitigation ofclimate-related risks

FTSE Russell’s mainindicators:– Internal carbon price– Scope 1, 2, 3
– Energy consumption– Emissions reduction targets– More than 20 sector specificmetrics

Source: FTSE ESG Scores Methodology, Final Report Recommendations of the Task Force

These revisions enable the TPI to align its Management Quality indicators with the
TCFD recommendations. Furthermore, TPI in conjunction with FTSE Russell isdeveloping indicators to assess the quality of companies’ scenario analysis (e.g.,does the company publish a scenario analysis? Does it document its assumptions?
Does it identify its central scenario?), and a more detailed framework that may be
used to analyse individual company scenario analyses.

FTSE Russell

3Case study | Capability story

Example application of TPI
methodology: automobile
manufacturers
In February 2018, TPI released the carbon assessment of the global top 20
automobile manufacturers. TPI examines how those companies manage climatechange risks and opportunities and how their current emissions and emissions
reduction targets compare with the international benchmarks for the sector.
TPI ran a qualitative analysis of carbon risks management and a quantitative
analysis of the current and anticipated carbon performance.
On management quality, the analysis found that automobile manufacturers divided
into two clusters (see Figure 2). Six companies were relatively poor performers. Of
these, three companies were on Level 0 (Unaware of, or not Acknowledging,
Climate Change as a Business Issue): Brilliance, Ferrari and Tesla. The other threecompanies were on Level 1 (Acknowledging Climate Change as a Business Issue):Geely, Subaru and Suzuki.
The other cluster of 14 companies rated highly on management quality; companies
were on either Level 3 (Integrated into Operational Decision-Making) or Level 4(Strategic Assessment). Seven companies were on Level 4: Daimler; Fiat Chrysler;
Groupe PSA; Mazda; Renault; Toyota; and Volkswagen. Only Daimler satisfied all
14 criteria.

Figure 2. Management quality of the world’s top automobile
manufacturers
Level 0
Unaware/Not
acknowledging

BrillianceFerrari
Tesla

Level 1
Acknowledgment

Geely
SubaruSuzukiLevel 2
Building capacity

Level 3Integrated into
operational
decision-making

Level 4
Strategic assessment

DaimlerFiat Chrysler
Groupe PSA
BMW
Mazda
Ford
Renault
General Motors Toyota
Honda
Volkswagen
Hyundai
Kia
NissanSource: Management quality and performance of automobile manufacturers as ofFebruary 2018

On carbon performance, the assessment profiled companies on the basis of theCO2 emissions performance of their fleets of new vehicles.
Companies’ fleet emissions were benchmarked against three scenarios, using
modelling from the International Council for Clean Transportation.

FTSE Russell

4Case study | Capability story

Three benchmark scenarios:
1. 2 Degrees (High Efficiency) – this benchmark achieves the overall aim of
the Paris Agreement to limit global warming to below 2°C primarily throughvehicle efficiency improvements and alternative fuel technologies
2. 2 Degrees (Avoid-Shift-Improve) – this benchmark achieves the Paris
Agreement’s 2°C target by placing more emphasis on avoiding the need fortravel and shifting modes of transportation, which allows for higher average
new vehicle emissions
3. Emissions reductions actually pledged by countries as part of the Paris
Agreement in the form of Nationally Determined Contributions or NDCs
Using data on companies’ future carbon intensity (based on the quantitative targets
they have set themselves to reduce new vehicle emissions), the research found that
12 out of the 20 companies had set such targets, five of which extend beyond 2020.
Eight out of 11 companies are aligned with the 2°C benchmarks in 2020 (Figure 3).
The companies with the lowest-carbon fleets of all in 2020 are Tesla, which only
makes electric vehicles, and Suzuki, which specialise in small, efficient vehicles for
the Indian and Japanese markets.

FTSE Russell

5Case study | Capability story

Figure 3. Carbon performance of the world’s top 20 automobile
manufacturers
Company

New vehicle average carbon emissions (gCO2/km, NEDC)
2013

2014

2015

2019

2020

BMW

159

152

147

138

137

Brilliance

174

171

157

Daimler

169

161

155

Ferrari

2022

2025

113

106

2030

141
No dataFiat Chrysler

176

182

170

Ford

156

155

156

Geely

153

156

139

General Motors

168

166

165

Honda

153

149

Hyundai

154

Kia

121

117

129

120

117

144

130

127

156

153

129

122

154

160

157

Mazda

141

135

134

120

117

110

100

83

Nissan

145

148

140

117

112

102

89

71

Renault

137

132

127

117

114

109

Subaru

160

160

157

Suzuki

114

111

109

106

105

Tesla

0

0

0

0

0

0

0

0

Toyota

142

136

134

118

114

Volkswagen

152

148

144

2 Degrees (Avoid-Shift-Improve)

147

145

143

124

119

111

99

80

2 Degrees (High Efficiency)

147

145

143

124

119

100

71

41

Paris Pledges

147

145

143

128

123

120

115

109

Groupe PSA

Aligned with 2°C (High Efficiency)
Aligned with 2°C (Avoid-Shift-Improve)
Aligned with Paris Pledges
Not aligned
Source: Management quality and performance of automobile manufacturers as ofFebruary 2018

Additional information
Learn more about the FTSE TPIClimate Transition Index.
Visit lseg.com/ftse-russell for more
information about our products
and services.

FTSE Russell

6

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