WHITE PAPER

Investor Portfolio Alignment
with the Paris Agreement
A Trucost multi-sector, multi-asset class approach

Authors
Drew Fryer

Steven Bullock

Jean-Florent Helfre

Olivier Trecco

Manager of ESG
Innovation andAnalytics

Global Head of ESG
Product Innovation
and Analytics

Head of ESG Business
Development, Central& Southern Europe

Co-Head,ESG Solutions

Trucost, part of
S&P Global

Trucost, part of
S&P Global

Trucost, part of
S&P Global

Natixis Investment
Managers Solutions

Natixis Investment Managers | Solutions

Contents

Contents
Executive Summary

3

Introduction

4

1. The Development of Paris Alignment Metrics for Corporates and Investors

7

2. Trucost's SDA-GEVA Approach

10

SDA Approach

13

GEVA Approach

14

3. Multi-Asset Class Applications of Trucost Paris Alignment Indicators

19

4. What Does Trucost's Paris Alignment Data Tell Us?

24

5. Investor Applications: Case Study of Natixis Investment Managers Solutions

27

Conclusion

29

2

Executive Summary

Executive Summary• The Paris Agreement's long-term temperature goal is to keep the increase in global average temperature to well
below 2°C above pre-industrial levels. Under this agreement, each country must plan and report on their climatechange mitigation actions. Institutional investors (insurance companies, pension funds, sovereign funds, banks,
asset managers) are now increasingly looking to align their strategies with the Paris Agreement. They also want toassess and report on portfolio alignment in practical terms.
• S&P Global Trucost’s approach to investor portfolio alignment assesses individual corporate decarbonization
rates against those required to achieve the goals of the Paris Agreement, and combines them into a
portfolio‑level assessment of alignment.
• Trucost’s approach can be widely applied and is both sector and asset class independent, applying two
alignment methodologies initially developed by academics and further developed by the Science Based Targets
Initiative (SBTi).
• The approach provides significant advantages in:a. The breadth of sectors and companies that can be assessed (so, broad, consistent coverage within a portfolio).
b. The ability to provide consistent assessments across a range of asset classes, including in the unlisted/illiquid
space (so, consistency in assessments between portfolios and asset classes).
c. Taking into account, where possible, industry-specific and economically feasible rates of decarbonizationand differing production growth rates of companies. This is done in a way that does not implicitly penalize
companies that are fast growing by requiring a one-size-fits-all rate of decarbonization in absolute emissions.
• Trucost's Paris Alignment dataset shows that more than two-thirds of listed companies are misaligned with
the Paris Agreement aim of limiting warming to 1.5–2°C. Better results, in general, are evident for the real estate
sector, as well as financial and health care, with typically lower direct emissions. Geographic differences arealso evident in the results, with a stronger alignment with issuers in developed markets compared withemerging markets.
• For asset managers that are dedicated to multi-asset portfolio management, Trucost's approach is particularly
relevant. Indeed, with diversification pockets currently on the rise, portfolio-level assessments are increasingly
less meaningful if they omit this pocket on grounds that data is non-existent or methodologies inconsistent. For
asset owners as well as asset managers, extending the alignment assessment methodology to private and illiquid
asset classes (e.g., real estate, infrastructure, private debt and private equity) is now critical for the following
reasons:• Reporting/regulatory requirements: Climate or sustainable finance disclosure regulations now tackle all
asset classes, not only liquid asset classes. Examples include the multi-asset class focus of the French
Energy‑Climate law or of the European Sustainable Finance Disclosure Regulation's allocation strategies thatcomprehensively reflect all sectors across a portfolio: The same carbon‑intensive or low‑carbon activity canbe found in both liquid or illiquid asset classes, hence the need to have the global picture.
• Integration of climate factors that can impact risks/returns: Climate change factors can have a direct impact
on the risk/return profile of illiquid assets.
• Engagement of invested companies to accelerate change towards good practice and drive more forcefulstewardship across asset classes: Investors in private equity, for example, now pay more and more attention at
the carbon profile of companies.
• Risk management that includes transition and physical risk exposure of assets in a portfolio: Conducting a
climate risk assessment is becoming increasingly important for infrastructure asset managers as an example.

3

Introduction

Introduction
In December 2015, 195 parties at the United Nations Framework Convention on
Climate Change (UNFCCC) reached consensus on the Paris Agreement, which aims
to keep global temperature rise well below 2°C above pre-industrial levels by
2100, and committed to pursue efforts to limit warming to 1.5°C.1 Approximately
97% of these parties have communicated their intended Nationally Determined
Contributions (NDCs) to combat the impacts of climate change and to increase
capital flows towards a low‑carbon and more resilient economy.2 Yet, according torecent data from Climate Action Tracker, even if all governments achieved their NDCs
by 2030, the world will still likely warm by 3°C or higher by 2100 ­— well above the 2°C
limit agreed upon.3 This is a call to action to the financial market to help facilitate anadequate flow of capital toward a low‑carbon economy. Scenario analysis is an aid
to facilitate this by enabling investors to determine which companies and sectors arecompatible with a below 2°C world and are better positioned to withstand potential
risks as a result of climate change.
A number of milestones show that the commitments made as part of the 2015
Paris Agreement have translated into concrete actions, in particular with relation to
the use of the alignment concept:• Article 173 of the French Energy Transition Law, entered into force on 30th
December 2015, was the first piece of legislation worldwide to require institutional
investors to disclose their contribution to climate objectives and to financial risks
associated with the energy and environmental transition. These requirements havebeen shown to be effective from the reports published in 2017 for the year 2016.
• In 2017, the Task Force on Climate-related Financial Disclosures (TCFD) released
climate-related recommendations for disclosing clear, comparable and consistent
information about the financial risks and opportunities presented by climatechange. As it focuses on risk analysis, it does not mention the concept of alignment,
but highlights the importance of climate scenario analysis.
• The publication in 2018 of the Intergovernmental Panel on Climate Change's (IPCC's)
special report on the impacts of global warming of 1.5°C above pre‑industrial levels
placed renewed focus on the importance of the 1.5°C scenario.
• The European Union (EU) has been particularly active on the topic. Publishedin 2019, the EU Climate Benchmark Regulation sets out criteria for indices andbenchmarks to be considered Paris-aligned. The EU Taxonomy for Sustainable
Activities, published in March 2020, identifies economic activities that are alreadycompatible with a 2050 net-zero carbon economy. Therefore, the percentage ofinvestments that are taxonomy-aligned indicates the exposure of a portfolio toactivities that are already compatible with a 2°C economy at a specific point in time.
• The EU has also come up with a list of adverse sustainability impact indicators
certain investors must report on going forward (under the Sustainable Finance
Disclosure Regulation). Carbon footprint, carbon intensity and carbon emissions
reduction initiatives are among the indicators that were selected.

UNFCC, “What is the Paris Agreement?”, https://unfccc.int/process/the-paris-agreement/what-is-the-paris-agreement
UNFCC, “Nationally Determined Contributions (NDCs)”, https://unfccc.int/process/the-paris-agreement/nationallydetermined-contributions/ndc-registry#eq-4
3
Climate Action Tracker, “The CAT Thermometer”, 2018, retrieved from: https://climateactiontracker.org/global/catthermometer
1

2

4

Introduction• Finally, companies, insurers, banks, asset owners, asset managers and governments are making net zerocommitments to achieve carbon neutrality. Net zero is achieved when the amount of greenhouse gas (GHG)
emissions that are released into the atmosphere is no more than what is removed from the atmosphere throughoceans and carbon sinks.
While 2°C alignment approaches can rely on any 2°C trajectories and methodological choices as long as these
are internally consistent, approaches that seek to capture alignment with the temperature objective of theParis Agreement need to fulfill additional requirements. The Paris Agreement not only sets an objective ofcompatibility with well-below 2°C trajectories, but it is also more prescriptive in terms of the principles embedded
within the desired well-below 2°C trajectory. 2°C alignment and alignment with the temperature objective of theParis Agreement are, therefore, different concepts.4
Table 1: Differences between temperature trajectories alignment and the Paris Agreement objectives
Trajectory(ies) principles

Methodological principles

Temperature trajectoriesalignment (e.g., 2°C
trajectory alignment)

Any, as long as it is compatible with theAny, as long as internally consistent:
relevant temperature outcome (e.g., 2°C). alignment as a mathematical measureof proximity.

Alignment with thetemperature objectiveof the Paris Agreement• Trajectories limiting the increase
to 1.5°C, with global peaking of
GHG emissions as soon as possible
followed by a rapid reduction ofemissions to achieve carbon neutrality
in the second half of the century.

• Internal consistency.

Precautionary principle:• Evaluations based on estimatesof how to optimize the long-termtransformation of the economy atleast cost.

• Trajectories with no or limited
overshoot.
• Lower reliance on GHG removal
technologies.

• Covers all sectors.
• Adopts a value-chain approach.
• Takes into account locked-inemissions.

• Updated through time.
• Takes into account uncertainty.

Alignment with theobjectives of theParis Agreement

Same as above but also takes into
account nationally determined climate
resilient low‑carbon development
pathways:• Takes nationally determined pathways
as a starting point.

Same as above:• Covers all activities (whole portfolio
asset classes).
• Captures incremental changes andlong‑term transformative outcomes.

• Takes into account adaptation andbroader sustainable development
objectives.
Source: The Alignment Cookbook, Institut Louis Bachelier, 2020, adapted from I4CE 2019, https://gsf.institutlouisbachelier.org/publication/the-alignment-cookbook-atechnical-review-of-methodologies-assessing-a-portfolios-alignment-with-low-carbon-trajectories-or-temperature-goal/

4

A Framework for Alignment with the Paris Agreement: Why, What and How for Financial Institutions?”, I4CE Institute for Climate Economics, September 2019,www.i4ce.org/wp-core/wp-content/uploads/2019/09/I4CE%E2%80%A2Framework_Alignment_Financial_Paris_Agreement_52p.pdf).

5

Introduction

For illustrative purposes only

Finally, as this paper puts the emphasis on the concept of Paris Alignment, it is important to remember that thismetric is but one of the key indicators that are essential for a complete climate analysis of an investment portfolio.
Each of these indicators, as summarized below, focuses on a different perspective and asks a specific question:
Figure 1: The role of Paris Alignment assessment in portfolio carbon analysis

Focus on outputs
Carbonfootprint

What quantity of GHG emissions are
emitted by a portfolio’s findings?

Focus on outcomes
Paris
Alignment

Are holdings emitting too much GHG?
How much is too much?

Focus on financials
Carbon Earnings
at Risk

What costs will be imposed on holdings
from a price on GHG?

Focus on financials
Physical
Risk

Source: S&P Global Trucost (2021)

6

Which holdings’ assets are exposed
to physical risks?

The Development of Paris Alignment Metrics for Corporates and Investors

1. The Developmentof Paris Alignment
Metrics for Corporates
and Investors
In recent years, the topic of alignment with scenarios for 1.5–2°C has received
significant attention from corporations and from their debt and equity investors.
The topic involves a very different frame of reference than the task of understanding
scenario alignment at a global economy-wide level, and has required thedevelopment of new techniques and methodologies to facilitate the task. At a
global economy-wide level, purely objective scientific concepts can be applied tounderstanding alignment with scenarios. However, the task of determining scenarioalignment for an individual economic actor or actors, including a fair and efficient
allocation of a share of the future global carbon budget, does not have simple orobjective answers. Conceptual and methodological tradeoffs and choices haveto be made.
A range of alternative approaches have been developed by academics,
non‑governmental organizations (NGOs) and investment practitioners sinceapproximately 2015. Today, a variety of approaches are in use and, so far, there isa lack of norms or consensus on a single appropriate methodology or standard forassessing alignment. Different methodologies may result in different conclusions
for a given company and, inevitably, different approaches have both advantages
and disadvantages.
Recently, governments and associated regulatory and oversight bodies havealso taken an increased interest and, in some cases, have developed guidelines,
recommendations or, occasionally, even regulations requiring investors to disclose
their level of alignment with the Paris Agreement. However, they have generally notprescribed a particular methodology or technique.
Key approaches to assessing Paris Alignment in the literature have focused on:• Technology mix• Transition pathways• Fundamental assessments, including qualitative management systems andgovernance structures• Emissions avoided/removed
Approaches can also be combined, for example by examining both qualitative
fundamental and quantitative transition pathway metrics.

7

The Development of Paris Alignment Metrics for Corporates and Investors

The most prevalent approaches at the time of writing are those advocated by:• The SBTi, a coalition of NGOs which recommends a series of possible approaches that can be described astransition pathway approaches, as they measure the rate of decarbonization relative to Paris Alignment goals
in one of several ways. Their recommendations are based on a menu of methodological options that, typically,
were first created by academics and several pioneering companies. According to the SBTi, their approaches haveachieved notable adoption by companies, with over 725 companies having set targets approved by the SBTi andmany more committed to setting such targets in the future. A key feature of the SBTi is its multi-stakeholder
buy-in, which has enabled relatively wide adoption of its approaches. The SBTi's various working groups take input
from multi-stakeholder groups that include civil society groups, scientific advisors, investors and companies.
• The 2 Degree Investing Initiative (2dii), an NGO, has developed an approach that can be called a technology mix
approach. This is because it focuses on the proportions of key high- and low-emitting production technologies
in key sectors that are required to achieve Paris-aligned warming outcomes. The 2dii's Paris Agreement Capital
Transition Assessment (PACTA) provides an online interface to produce free portfolio results that has been muchused by investors. It provides forecasts of emissions based on asset-level databases, which are then comparedwith sector-specific requirements from climate scenarios.
Table 2: Alternative approaches to assessing Paris Alignment

Technology mix

Description

Advantages

Disadvantages

Common names

Used byDirectly relates toshare of “brown” or“green” activities.

Intuitive. Less
complex tointerpret than GHG
emissions metrics.

Only possible fora narrow range ofsectors (approx.
10% of diversified
portfolios).

Capacity-based
approach.

PACTA

Absolute
contraction.

SBTi individualcompany
target setting
recommendations.

Could beconsidered tooprescriptive: there
is no consensus on
optimal technologymix.
No portfolio‑wide
assessment signal.
Transition
pathway:absolute based

Assumes absolute
reduction ofemissions at
homogeneous rate:• Well-below 2°C:
Min. 2.5% annual
linear reduction• 1.5°C: Min. 4.2%
annual linear
reduction

8

Portfolio-level
aggregation of
results possible.
Can be applied toany sector.
Requires least
company data tocalculate aligned
trajectory.

May favor slow
growth companies
and sectors overthose with fast
production or
activity growth.
“One-size-fits-all”
approach.

SBTi /CDP/
WWF* portfolio
temperaturescoring tool.

The Development of Paris Alignment Metrics for Corporates and Investors

Table 2: Alternative approaches to assessing Paris Alignment (continued)
Description

Advantages

Disadvantages

Common names

Used by

Sector-specificphysical or
economic
intensity-based
benchmark(depending if thesector carbon
budget is divided
by a physical or
financial factor).
Intensity-based
benchmarks (by aunit of production)
are the best
suited to compare
companies
operating within
the same sector.

Portfolio-level
aggregation of
results possible.

Physical intensitybased approach(SDA) can only
be applied toa limited set ofhomogeneous
sectors.

SDA.

SBTi individualcompany
target setting
recommendation(SDA for selected
sectors, or GEVA
currently wherecombined with anabsolute emissions
reduction target),
Trucost.

Fundamental

Multiple indicators,
includingqualitative
indicators coveringrisk management
and corporate
governancestructures.

Considers multiple
and more diverse
indicators, taking
reliance off a single
indicator.

Opportunities forgreenwashingand disclosurebias by ranking
disclosures.
Companies withmost publicpressure, incentive
or resources todisclose may excel.

Transition Pathway
Initiative, ACT

Avoided/removed
emissions

Mitigation
options include
decarbonization,
carbon dioxide
removal, avoided
emissions andoffsetting withcarbon credits.

Maximizing the
avoided emissions
associated witha portfolio isa potentiallyinterestingmeasure to assess
and incentivize
investors toallocate capital tothe most impactful
climate solutions.

Potential double
counting issues.

MirovaTransition
pathway:intensity-based

Sectorindependent.
Accounts fordifferences incompany growth
rates.
SDA* takes
account of
economicallyefficient
decarbonization
rates for sectors,
where executable.

*CDP: Carbon Disclosure Project
WWF: World Wildlife Fund
SDA: Sectoral Decarbonization Approach
GEVA: Greenhouse Gas Emissions per unit of Value Added
IIGCC: Institutional Investors Group on Climate Change
Source: S&P Global Trucost (2021)

9

No consensus
yet on inclusionof avoided/
removed emissions
in recognizedframeworks(IIGCC* Net Zero
Investment, SBTi
for financial
institutions).

Economic intensity
or contraction ofcarbon intensity
approaches(e.g., GEVA*).

Trucost's SDA-GEVA Approach

2. Trucost's SDA-GEVAApproach
Trucost's Paris Alignment assessment enables investors to track their portfolios
and benchmarks against the goal of limiting global warming to below 2°C frompre‑industrial levels, as well as other climate change scenario outcomes. The
approach taken by Trucost can be described as a transition pathway assessment,
which examines the adequacy of emissions reductions over time in meeting a
2°C carbon budget. It tracks company emissions and activity levels, including
forward-looking indicators over a medium-term time horizon. It is one of several key
approaches to 2°C alignment assessment in growing usage today.
Trucost has taken an approach that most closely parallels SBTi recommended
approaches advocated for individual companies to set Paris Agreement aligned
1.5–2°C targets. However, it is applied to a universe of thousands of companies that,in turn, can be applied to a diversified investment portfolio.
The SBTi promotes best practice in science-based target setting towards thetransition to a low-carbon economy and is a collaboration between CDP, the United
Nations Global Compact (UNGC), World Resources Institute (WRI) and the WWF.
Trucost's Paris Alignment assessment adopts two key methodologies initiallydeveloped by academics and also highlighted by the SBTi: 5• A physical intensity-based approach: SDA• An economic intensity-based approach: GEVA
These, among others, are approaches the SBTi recommends could be used byindividual companies to define company GHG emission reduction targets, or futuretransition pathways, consistent with the Paris Agreement. Setting such targets inadvance of carbon regulations enables companies to be well equipped to respondto transition risks. Some companies have set verified targets with SBTi, while others
have formally committed to setting targets in the future consistent with achieving theParis Agreement using these and similar methodologies.6

Key references for further explanation of these methodologies include: “Aligning corporate greenhouse-gas emissions
targets with climate goals”, published in the journal Nature Climate Change (2015), by Oskar Krabbe, Giel Linthorst,
Kornelis Blok, Wina Crijns-Graus, Detlef P. van Vuuren, Niklas Höhne, Pedro Faria, Nate Aden and Alberto Carrillo Pineda;“Greenhouse gas emissions per unit of value added (“GEVA”) — A corporate guide to voluntary climate action”, in thejournal Energy Policy (2012), by Jorgen Randers.
6“The new normal: 1,000 companies are now setting science-based climate targets”, 08/10/2020, Science Based Target
Initiative, https://sciencebasedtargets.org/blog/the-new-normal-1-000-companies-are-now-setting-science-basedclimate-targets
5

10Trucost's SDA-GEVA Approach

Trucost adapts these two methodologies to be scalable from individual company target-setting to assessmentsof portfolios that may include hundreds or thousands of companies. Trucost's SDA-GEVA is already used by many
investors, including CNP Assurances,7 Fonds de Reserve des Retraites (FRR),8 Government Pension Investment
Fund (GPIF),9 Établissement de Retraite Additionnelle de la Fonction Publique (ERAFP),10 KBC Group,11 Allianz,12Generali,13 BNP Paribas Cardif,14 Banque de France,15 FDC Luxembourg16 and others. It supports the identification ofindustry leaders and laggards when it comes to decarbonization. A key advantage of a transition pathway approachis its ability to be applied across a wide variety of portfolio holdings, plus be aggregated to portfolio-level results.
It is not limited to the assessment of one, or a small number of sectors or business activities.
An alternative approach, the technology mix approach to 2°C alignment, is limited in its application to businessactivities with widely disclosed technology mixes, e.g., power generation. This approach, though used in the pastby Trucost, is useful for within-industry comparisons and provides intuitive results, but cannot generally be
expanded upon or aggregated to a portfolio-level assessment. For this reason, Trucost has adopted the transition
pathway approach.

CNP Assurances Sustainable Investment Report 2019, https://www.cnp.fr/en/cnp/content/download/8987/file/RIR%202019%20VA%20pour%20mise%20en%20
ligne%20V%2008.2020.pdf
FRR LTE Report 2018, https://www.fondsdereserve.fr/documents/Rapport-Article-173-LTE-FRR-2018.pdf
9GPIF TCFD Report 2019, https://www.gpif.go.jp/en/investment/trucost_report_en.pdf
10
ERAFP Public Report 2019, https://www.rafp.fr/en/sites/rafp_en/files/publication/file/rafp-ra-uk-2019-v3_page.pdf
11
KBC Group Sustainability Report 2020, https://www.kbc.com/content/dam/kbccom/doc/sustainability-responsibility/PerfRep/2020/csr-sr-2020.pdf
12
Allianz France Sustainable Investment Report 2020, https://www.allianz.fr/content/dam/onemarketing/azfr/common/marque/pdf/BROCH_ALZ_INVESTMENT_REPORT-2020_FR.PDF
13Generali France Climate Book 2019, https://institutionnel.generali.fr/sites/default/files/book_climat_site_institutionnel.pdf
14
Cardif SFDR Report 2020, https://cardifluxvie.com/documents/66941/477304/Rapport_SFDR_2020.pdf.pdf/7d00b878-acb1-dc95-b5a0-290c671f3d5c
15Banque de France SRI Report 2020, https://publications.banque-france.fr/sites/default/files/medias/documents/rapport_investissement_responsable_2020.pdf
16
FDC Rapports d'investisseur responsable 2020, https://www.fdc.lu/fileadmin/file/fdc/Rapport_investisseur_responsable_2020_%28version_finale_web%29.pdf
7

8

11

Trucost's SDA-GEVA Approach

Figure 2: Illustrative headline results of a Trucost portfolio Paris Alignment report

Paris Alignment
UNDERSTANDING PARIS ALIGNMENT
ming to 2°C above pre-industrial
levels. The assessment examines the adequacy of emissions reductions made over time, by investees, in meeting these targets. It incorporates both historicalperformance as well as forward-looking indicators (over a medium-term time horizon). This avoids the uncertainties of using only forward-looking data, and is of a
sufficient time horizon to make the effect of any year-on-year volatility less significant. Historical data on greenhouse gas emissions and company activity levels
is incorporated from a base year of 2012. Forward-looking data sources are used to track likely future transition pathways from the most recent year of disclosed
data through to 2025.
Trucost's approach is adapted from two methodologies highlighted by the Science Based Targets Initiative (SBTi), these being the Sectoral Decarbonization
Approach (SDA) and the Greenhouse gas Emissions per unit of Value Added (GEVA) approach. The SDA is applied to companies with high-emitting, homogeneous
business activities, while GEVA is applied to those with lower emitting, heterogeneous business activities. For more informat ion on the methodology please refer
to Appendix 3.

EMISSIONS TRAJECTORY

SECTOR CONTRIBUTIONS

The chart shows the portfolio and benchmark's 2012-2025 trajectory andcompares that to its own 2 degree aligned trajectory.

Companies with predominantely homogenous business activites that fall
into one of the 5 sectors in the table below were assessed using the SDA
approach. This means that the required carbon intensity reductions were
calculated in sector specific units of production (for example tonnes ofsteel produced, or number passenger miles flown), and each company's
share of the overall sector budget is calculated relative to its market share.

Emissions Trajectory vs. 2 Degree Aligned Levels, 2012-2025
600,000
500,000

Companies with low emitting or heterogeneous business activities wereassessed using the GEVA approach. This means that required carbon
intensity reductions were calculated in carbon-per-dollar of value added(gross profit), and each company's share of the overall sector budget is
calculated using its progress against required reduction rates.

400,000
300,000
200,000
100,000
0

Portfolio

Portfolio - 2D Aligned

BenchmarkBenchmark - 2D Aligned

LEVEL OF WARMING
The boxes below show the level of warming associated with the portfolio andbenchmark, based on performance over the period assessed.

Portfolio (oC)Benchmark (oC)>3>3
Portfolio
961,261
14.4%
382

Tonnes Carbon (Under)/Over
Percent of Total (Under)/Over
Carbon/mInvested (Under)/Over

Benchmark703,680
23.8%
280

Method Sector
SDA
Power Generation
CementSteel
Airlines
Aluminum
GEVA
Communication Services
Consumer Discretionary
Consumer Staples
EnergyFinancials
Health Care
Industrials
Information Technology
Materials
Real Estate
Utilities

Contribution (tCO2e)45,033
8,888
25,704
10,381
0
7,565
17,59028,427
288,430-1,4006,434
45,272
8,005
131,796
69,752
67,256

Pathway (oC)
2 to 2.7
2 to 2.7
>2.7
>2.7
>5
2 to 3>5>5
1.5 to 2
>5
>5
>5
>5
>5
>5

ENERGY TRANSITION 2 DEGREE ALIGNMENTIn addition to the emissions alignment analysis above, Trucost is also able toassess the portfolio's energy mix alignment to a 2 degree scenario. The righthand chart shows the share, by energy type, of the total GWh apportioned to theportfolio and benchmark. This can be compared to the energy mix required at
different reference years for the low carbon economy of the future, as suggestedby the International Energy Agency's (IEA) 2 degree scenario.
As not all energy companies disclose GWh produced, it is also useful todetermine exposure to energy 'aggravators' and 'mitigators' based on sources ofrevenue. The chart below shows total exposure to companies with any energy
revenues (total bar size), while the light blue, dark blue and yellow segments
represent the weighted-average revenue exposure to fossil fuel, renewable, andother energy revenues respectively.

Energy Generation Mix - % of Total Portfolio GWh
100%
90%
80%
70%
60%
50%
40%
30%
20%

Exposure to Energy Revenues

10%
Portfolio

0%Portfolio

BenchmarkBenchmark
0%

2%

4%

6%

8%

10%

Fossil Fuel Energy Revenue

Renewable Energy Revenue

Other Energy Revenue

Company Level Exposure

IEA (World)
2016
2 Degree
Scenario*

IEA (World)2025
2 Degree
Scenario*

IEA (World)2030
2 Degree
Scenario*

IEA (World)2050
2 Degree
Scenario*

12%
Coal
Fossil energy with CCS
Hydroelectric

Petroleum
NuclearBiomass

Natural Gas
Other sources
Other Renewables* The content within table above was prepared by S&P Trucost Limited, with data derived from the 2 Degree Scenarios developedby the International Energy Agency. ©OECDIEA 2017. The
content within the table above does not necessarily reflect the views of the International Energy Agency.

TCFD Aligned Report

Source: S&P Global Trucost (2021)
For illustrative purposes only

12

6

Trucost's SDA-GEVA Approach

SDA Approach
The SDA is applied to companies with high-emitting, homogeneous business activities. Its core principle is thatcompanies in each industry must converge toward emissions intensities consistent with a 2°C scenario by 2050
from their unique starting points. It uses industry-specific 2°C scenario pathways, with companies measured
using industry-specific emissions intensities and physical production levels (e.g., tCO2e per gigawatt hours (GWh)or per ton of steel). Inflation, therefore, does not affect the calculation. Industry-specific transition pathways
may be faster (e.g., power), or slower (e.g., cement) depending on an industry's available technologies, specificmitigation potential and costs of mitigation. Within a given industry, companies with low base-year emissions andlow production growth can reduce emissions at a gradual rate. Companies with high emissions or high production
growth must make faster reductions.
The scenarios used in SDA assessments are International Energy Agency (IEA) scenarios from Energy Technology
Perspectives (ETP) 2017. These provide SDA assessment parameters consistent with 1.75°, 2° and 2.7°C of warming.
Figure 3a: SDA's differentiated Paris-aligned transition pathways by key sector
120
100
80
60
40
20
0
2010/2014

2025

Global Economy

2030
Cement2035

2040

Aluminium

2045

Steel

2050

Air transport

2055

2060

Power generation

Y Axis: On a 100-point scale
Source: S&P Global Trucost (2021), based on SBTi

Figure 3b: Differentiated convergence pathways within sector based on baseline intensity

Carbon intensity per unit of production

2.5
2
1.5
1
0.5
0

2010

2020
Sector requirement

Source: S&P Global Trucost (2021), based on SBTi

13

2030
High intensity convergence pathway

2040

2050

Low intensity convergence pathway

Trucost's SDA-GEVA Approach

GEVA Approach
GEVA is applied to companies with lower-emitting or heterogeneous business activities. It recognizes that many
companies have diverse business activities, most of which do not have distinct transition pathways defined inclimate scenarios. For these companies, GEVA entails applying a contraction of carbon intensity principle. Under
this principle, a company should make emissions reductions consistent with rates required for the overall economy,
from each company's unique base year emissions intensity. It uses a non-industry specific, economy-wide 2°C
scenario and emissions intensities with a financial, not physical or production, denominator. Each company's
transition pathway is measured as its GHG per unit of inflation-adjusted gross profit (revenue minus costs of goodssold), representing its contribution to total global emissions and emissions intensity. This is compared with a global
economy-wide emissions intensity pathway required for achieving below 2°C of warming.
The scenarios used in GEVA assessments are Representative Concentration Pathway (RCP) scenarios used in theFifth Assessment Report (AR5) from the IPCC. These provide GEVA assessment parameters consistent with 2°, 3°,4° and 5°C of warming. A 1.5°C scenario is also available in line with recent guidance from the SBTi and European
Union Paris-aligned Benchmark requirements.
Figure 4: Carbon intensity evolution for two different companies (blue or yellow line) but with the same
IPCC‑based reference scenario (dotted line)
Company B

Company A
600

18CO2e per unit value add

16

500

14

400

12
10

300

8

200

6
4

100

2
0

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: S&P Global Trucost (2021)

Integrating multiple sources of forward-looking data
Scenario alignment approaches have generally used only one source of forward-looking emissions data,typically either:• Emissions reduction targets (e.g., Transition Pathway Initiative, SBTI), or• Asset-level data (e.g., 2dii, Oxford Smith School)

14

Trucost's SDA-GEVA Approach

Table 3: Forward-looking indicators applied to assessments
Source of forecast

Coverage

Typical sources

Approximate
coverage acrossuniversal portfolios

ExampleCompany emissions
reduction targets

Voluntary disclosure bycompanies, generally
more common amonglarger companies indeveloped markets

Company reports, CDP

Less than 1/3 ofcompanies

SBTi temperaturescoring tool

Asset level data/
capital expenditure(CAPEX) plans

Generally high-emitting Proprietary commercial Less than 1/5 ofindustries; somedatabases
companies
databases have global
coverage

2dii PACTA

Source: S&P Global Trucost (2021)

Taking just one approach, though, has a key disadvantage in either limiting coverage to companies that provide
voluntary forward-looking disclosures, or to sectors where such forward-looking indicators can be derived fromthird-party datasets with information on key investment decisions. This information includes the construction of
new facilities, which can be used to estimate the future path of emissions.
Trucost expands on this by incorporating multiple sources of forward-looking data in a clear data hierarchy, whichenables a more comprehensive coverage universe not limited to either a small number of sectors or to companies
that have voluntarily set targets.
Trucost's data hierarchy (applied to both SDA and GEVA) is as follows:• Company emissions reduction targets or, if not available, then,• Asset-level data or, if not available, then,• Company-specific historical trends (for companies assessed using SDA), or,• Sub-industry-specific historical trends (for companies assessed using GEVA) or, if not available, then,• No change in emissions intensity.

15

Trucost's SDA-GEVA Approach

Figure 5: Data hierarchy per approach
Heterogenous sectors

Homogenous sectors

GEVA

SDA

Historical data hierarchy

Forward-looking hierarchy

Historical data hierarchy

Forward-looking hierarchy

1

Disclosed

1

Disclosed
reduction targets

1

Disclosed

1

Disclosed
reduction targets

2

Modeled2

Sub-industry
average historicalemissions trends

2Modeled2

Asset-level
data sources3

No change inemissions intensity

3

Company-specifichistoricalemissions trends

4

No change inemissions intensity

Source: S&P Global Trucost (2021)

Advantages of Trucost's intensity approaches
The SBTi recommends that company-level science-based targets be set using one of three broad approaches:absolute target, economic intensity-based or physical intensity-based.
Absolute contraction sets an equal absolute percentage of X% reduction requirement by year YYYY on any given
company, regardless of the characteristics of the company. It is the simplest approach to execute when setting ascience-based emissions reduction trajectory.
GEVA and SDA take more tailored, but more data-intensive, approaches to plot fairer required emissions pathways
based on several relevant company-specific and/or sector-specific characteristics not considered under anabsolute contraction method.
The absolute contraction approach differs from the Trucost SDA-GEVA approach in several ways:a. The absolute contraction approach focuses on a single source of emissions forecasts and includes a fixedassumption about all other companies without targets.
b. Its absolute target setting methodology applied to all companies means that companies with fast growth rates
in activity/production implicitly are required to carry a much higher burden. They would be required to achieve amuch greater rate of operational efficiency to achieve a fixed, undifferentiated absolute reduction requirement,
compared with a company with a slow rate of growth in activity/production.
c. The absolute contraction approach tends to ignore sectoral differentiation in alignment trajectories that can becalculated for several very high-emitting sectors, which enables optimization of decarbonization where it is mosteconomically efficient.

16

Trucost's SDA-GEVA Approachd. The absolute contraction approach puts radically different relative obligations on companies where they havedifferent activity growth rates. Consider, for example, a long-established mature supermarket chain growing
profits by 1% a year versus an IT company with a breakthrough technology and business model growing profits
at 20% a year. Absolute contraction would indicate that both should reduce their emissions by a fixed X% by year
YYYY. But, in intensity terms, this would mean that the fast-growing company must reduce its emissions intensity
much faster than the mature company per unit of activity/value added. If, instead, we consider the relevantgoal for alignment to be in intensity terms, then we can better equalize the GHG mitigation effort required
between different companies that have different underlying growth rates. At the extreme, it can let a very fast
growing company reduce its emissions intensity in line with that required for the economy as a whole, while still
increasing its absolute emissions, should it have a very fast activity growth rate. Other companies with slower
activity growth rates would be reducing their emissions intensity and absolute emissions.
Trucost believes GEVA, an economic-based approach, is better placed to capture variations in companies'
relative growth rates to achieve a fairer burden-sharing outcome across companies. This is because under GEVA,
companies can reduce emissions intensity on a fixed-rate basis but, given their underlying activity growth rates,
their absolute emissions can still evolve at different rates dependent on their unique activity growth rates.
GEVA relies upon a relatively simple manipulation of an absolute approach, in that it can use the same underlying
scenario data, but with the required aligned emissions trajectory expressed as an intensity. This is emissions/GDP
at the global economy level, or emissions/value added (inflation-adjusted gross profits) at the company-level
equivalent — replacing a fixed and inflexible required absolute emissions reduction rate. However, we can consider
an absolute-based approach and an economic-based approach as two sides of the same coin. The bottom lineis that intensity targets for Scope 1 and Scope 2 emissions are only eligible when they lead to absolute emissions
reduction targets.
Absolute contraction also does not consider the relative costs of emissions abatement that we can differentiate
between some industries and companies within those industries using the SDA. Nor does GEVA explicitly
differentiate between differing costs of abatement per unit of profit for different companies — which is why Trucost
prefers SDA to GEVA, wherever it is executable.
For several of the highest-emitting sectors, such as power, steel or cement, some scenario datasets (most notably
one published by the International Energy Agency) have individual sector-level detail in what would be the mostcost-effective sectoral emissions pathways to achieve the Paris Agreement. We can also differentiate what
historical progress a company has already made relative to its broader sector, and then infer whether further
abatement by that company would likely be a relatively high cost or relatively low cost within its sector based on its
current carbon efficiency.
Fairer pathways, based on cost of abatement, can be plotted that take account of an individual company's sector
and its relative carbon efficiency within that sector. In that way, we can differentiate the fairest pathway based on
the likely relative costs of abatement, for example, between a power generation company and a cement company.
We can also look at the likely relative costs of abatement, for example, for a power company that has alreadysignificantly reduced its emissions versus one that has not.
The SBTi has traditionally recommended that an individual company consider all three approaches when
deciding in what manner to set a science-based target, and then selecting the appropriate method within several
constraints and guidelines. Recently, however, the SBTi has become more focused on the absolute contraction
method, despite its limitations.

17Trucost's SDA-GEVA Approach

In one context, this appears to be a consequence of the simplicity and ease of applying the absolute method, as it
has by far the fewest data input requirements of the three. This appears to be a key reason why the SBTi's recently
announced pilot portfolio-level temperature tool appears to use only an absolute contraction method to measure
the adequacy of company targets and the adequacy of portfolio-level decarbonization pathways. Such an approach
does not require knowledge of a company's activity or production level, but only requires one year of absoluteemissions data and a target for each company. In addition, the SBTi appears to have become more concerned overtime with a perceived risk of GEVA. That is, if a lot of companies have fast activity growth rates, they may appear
to be operating within their carbon budget in intensity trend terms, but grow their absolute emissions too fast in
aggregate across companies to meet the global Paris-aligned carbon budget.
The SDA not only has an intensity reduction requirement, but also enforces an absolute cap and absolute reduction
requirement on emissions for the most consequential high-emitting sectors. Other sectors where only GEVA can beapplied are: (1) Not individually consequential in terms of absolute emissions and so are unlikely to bust the global
carbon budget by growing company/sector activity and emissions too fast; and (2) With the vast number and uniquecharacteristics of individual economic actors/emitters/sectors, it is highly unlikely that faster than expected activity
growth will occur at such a broad-based economy-wide scale that it would be, in aggregate, out of line with theaggregate GDP/activity growth expectations embedded in the relevant climate scenarios.

18Multi-Asset Class Applications of Trucost Paris Alignment Indicators

3. Multi-Asset Class
Applications of Trucost
Paris Alignment
Indicators
A key advantage of Trucost's Paris Alignment dataset is its ability to be applied widely
across a range of industries and asset classes in a consistent fashion with directlycomparable results. Multiple portfolios with different sectoral compositions, andeven different asset classes, can be compared against one another at the aggregatedportfolio level and individual constituent levels, without resorting to widely divergent
methodologies or having large data gaps.
Trucost has off-the-shelf coverage of equity and fixed income issuers. This coveragecan be extended based on an investor's individual needs for alternative asset classes,
as long as the issuer is a corporate issuer and has a modicum of data available.
Table 4: Asset class coverage

Asset classStandard coverage Custom coverage

Potential future
standard coverage

Public equity

Private equity

Sovereign debt

Public debt

Private debt
Infrastructure
Real estate

Apportioning factor

Market value of theholding (equity only
investors) or Total
Enterprise Value ofholding (for debt andequity investors) is
typically used

Total capital

Gross debt

orTotal assets

Source: S&P Global Trucost (2021)

Foundations of the extension of the methodological approachbeyond listed assets
In recent years, GHGs and other data required for alignment assessments havebecome relatively well disclosed across public equity markets, but this is still lessprevalent among listed small cap and emerging market companies. They are alsomuch less prevalent in private markets and alternative asset classes.

19

Multi-Asset Class Applications of Trucost Paris Alignment Indicators

To address increasing investor demand, particularly from these segments, Trucost recently expanded its Paris
Alignment coverage to include the capability to complete assessments for companies where GHG data disclosure
is incomplete, and to offer a range of options for investors that operate across non-listed asset classes.
Trucost has also begun to provide an option to clients to provide private data that enables a Paris Alignment
assessment of holdings outside the public listed universe.
For asset managers specializing in private equity, private debt and other alternative asset classes, their closeworking relationships with investee companies can sometimes entail an ability to source data that is not in the
public domain, or to request private companies to disclose such data in the public domain for the first time.

Inputs required for custom coverage
There are two ways to provide custom coverage:
1. Trucost collects additional financial/production data for the individual issuers/assets of interest using
its own desk research and data available through the S&P Global Market Intelligence platform (which gathers
financial data on millions of private companies worldwide).
2. The investor client provides the necessary GHG, sector and financial/production data directly via theirrelationships with investee companies.
The table below summarizes the emissions and production/financial inputs data that are needed forcustom coverage.
Table 5: Issuer data inputs required
SectorProduction/financial
variable required

Approach

Power generated (GWh)

SDA

Metric tons of
cement produced

SDA

Passenger air transportation

Revenue passenger
kilometers

SDA

Aluminum production

Metric tons ofaluminum produced

SDA

Power generation(including electricity
generation project finance)
Cement production

Steel production

Emissions variablerequired

Scope 1 emissions intensity
per unit of production

Scope 1+2 emissions intensity Metric tons of
per unit of production
steel produced

Paper production
Real estate andmortgage loans

Oil and gas production

Metric tons of pulp, paper
and paperboard produced

SDA

Scope 1+2 emissions intensity Floor area in m2
per unit productionororGross profits (USD) (revenue

SDA or GEVA

Scope 1+2 metric tons
CO2 equivalentminus cost of goods sold)Scope 3 use of sold products

Production of oil

SDA

Production of natural gas

20

SDA

Multi-Asset Class Applications of Trucost Paris Alignment Indicators

Table 5: Issuer data inputs required (continued)
SectorEmissions variablerequired

Production/financial
variable required

Approach

Automobile manufacturing

Scope 3 use of sold productsPassenger kilometers

SDA

or
Vehicle kilometers
All other sectors(includes private equity
and debt) (GEVA)

Scope 1+2 metric tons
CO2 equivalent

Gross profits (USD) (revenue
minus cost of goods sold)

GEVA

All sectors including thosenamed individually above(beneficial, but not required)

Target for future emissions
reduction or emissions
intensity reduction

Target for production
growth in output or grossprofits terms

SDA/GEVA as applicable

Source: S&P Global Trucost (2021)

Having several years of historical GHG emissions, together with financial or production data for those years, iscritical for a transition pathway-based alignment assessment. This is because it measures the adequacy of a rateof change in emissions intensity and emissions over time. Trucost generally considers four years of data history to
be sufficient at minimum (e.g., 2016, 2017, 2018 and 2019 data), plus any additional years of available history will bebeneficial to improve the quality of the alignment signal. Where available, Trucost includes data from 2012 onward,
with targets assessed as far out as 2025. These are expected to be periodically adjusted as time passes, however,
to maintain a relatively constant number of years within the backward- and forward-looking horizon.
For private assets, where data limitations are greater, having multiple historical years of data could be replaced byhaving a published target that the company has committed to for future years. In this case, a minimum of one yearof historical emissions and production/financials would be sufficient, and any further years of history would be
beneficial, along with a target covering at least four future years.
Table 6: Minimum years of data required for custom alignment assessment
Years of data required
No target available

Minimum of four years, with further historical years desirable

Target available

Minimum of one historical year plus a target covering four future years, with further historicaland forecasted years being desirable

Source: S&P Global Trucost (2021)

Modeling for missing data points
If emissions data cannot be attained from companies, estimates for emissions data can be calculated for missing
years, wherein Trucost estimates emissions values over at least a four-year historical period. For this, Trucost
needs to receive from the client, or obtain from readily available sources in the public domain, the revenue (% orlocal currency) from underlying business segments, which are normally in business segment disclosures in mostcompany annual reporting. These would ideally be classified using the North American Industry Classification
System (NAICS), or another widely used sector classification system. Gross profit or production data over at leasta four-year historical period would need to be received from the client, or through readily available sources, as
per above.

21

Multi-Asset Class Applications of Trucost Paris Alignment Indicators

It should be noted that this modeled method will provide an indication of alignment but is less reliable than theuse of actual emissions data. This is because alignment models are sensitive to the accuracy of GHG data andexpected average levels of modeling error can be expected to generate false temperature alignment inferences insome circumstances. These should be used as a last resort where GHG emissions data is unavailable and a signal isrequired. Trucost can produce such estimates, together with an accompanying confidence score that qualifies thelimitations in the data sources relied upon.

Data Confidence Scores
To help support client decisions regarding which data to incorporate for each unique use case, Trucost provides aParis Alignment Data Confidence Score alongside each issuer's assessment values.
Table 7: Data Confidence Scores
Paris Alignment
Historical data
Data Confidence Score

Forward-looking dataA

6+ years disclosed GHG

Target or Capex

B

4+ years disclosed GHG

Trend

C

Modeled GHG

Target or CapexD

Modeled GHG

Trend

E

4+ years of disclosed/modeled GHG or Target

Source: S&P Global Trucost (2021)

A key application of this Confidence Score would be to enable individual investors to make informed case‑by‑casedecisions whether or not to include coverage of companies with modeled emissions in their Paris Alignment
calculations. For some portfolios and asset classes, coverage may be adequate using only issuers with full
disclosure of GHG emissions (Confidence Scores of A or B). This would avoid the need to use supplementarymodeled data where the chance of making false inferences on alignment are greater. Whereas, for other portfolios
and asset classes with low disclosure of GHG emissions, an investor may wish to apply modeled data to provide analignment signal where otherwise no signal would be available.

The specific case of infrastructure assets
Selected infrastructure assets would be assessed using the SDA model, for example where the assets are focusedon power generation and, in select other cases, using the general economic-intensity based GEVA model. However,infrastructure assets would be covered selectively, and not all types of assets would be covered using thesecurrently available methods. This approach would align as much as possible with the SBTi suggestions (see below).

22

Multi-Asset Class Applications of Trucost Paris Alignment Indicators

Table 8: SBTi suggested methods for infrastructure and loans
Asset class

Products and requirement
for inclusion in targets

Consumer loan Residential mortgages

ProjectfinanceRequired minimum coverage Applicable methods
for required activities
Optional

SDA

Motor vehicle loan

Not applicableNot available

Personal loans

Not applicableNot available

Electricity generation
project finance100% of base activity (kWh)SDA

Other project finance(e.g., infrastructure)

Not applicableNot available

Minimum 67% of baseyear activity (m2)

SDA

Corporate loan:electricity generation

100% of base year
activity (kWh)SDA

Corporate loan: otherlong‑term debt (morethan one year), excluding
electricity

Fossil fuel companies:
minimum 95% of baseyear corporate

SDA, wheresector-specificmethods areavailable

Corporate loan Corporate loan:commercial real estate

SBT portfolio Temperature
coverageratingSource: SBTi (2021)

Individual near zero emitting assets and companies
The transition pathway approach of assessing Paris Alignment employed by Trucost works exceptionally well forthe vast majority of issuers. Since it is based upon the concept of required reductions in annual emissions intensityand emissions, however, it can provide unintuitive results for companies whose business models are alreadyfundamentally aligned with a low-carbon economy. This can include dedicated renewable power generators,
dedicated recyclers of aluminum/steel or real estate companies/assets that have a lengthy history of only using
renewable power. These types of entities are unlikely to be able to achieve significant future emissions reduction
due to past mitigation actions.
For these types of issuers, Trucost recommends that the assessment considers whether that issuer meets thestatic emissions-intensity threshold consistent with below 2°C of warming for its industry in 2040. This is consistent
with the static level in European Union guidance and recommendations on Paris-aligned Benchmarks and asustainable taxonomy for alignment for power generators (emissions intensity of <100gCO2e/kWh).

23

What Does Trucost's Paris Alignment Data Tell Us?

4. What Does Trucost'sParis Alignment Data
Tell Us?
Trucost's Paris Alignment dataset for corporates supports the thesis thatsignificantly greater efforts will be required across the economy to achieve the goalsof the global Paris Agreement. More than two-thirds of listed companies assessed
are misaligned with the Paris Agreement aim of limiting warming to 1.5–2°C.
Figure 6: Temperature alignment by activity and sector
Proportion of Paris-aligned issuers by sector

50%

Scope 3boundary

Scope 1+2 boundary

45%
40%
35%
30%
25%
20%
15%
10%
5%

s
ob

ile

gy
Au
to

m

er

s

En

ce
rv
i

Se

ca

tio

n

M

at

er

us
tr

ia

ia

ls

ls

le
s
In
d

ap

ry

St
er

um

Co

m

m

un
i

ns

Co

er

Di

sc

re

tio

na

lo
gy

s

ns
um

Co

In

fo

rm

at
io
n

H

Te

ch

no

tie

re

Ut
ili

lth

Ca

ia
ea

nc
na

Fi

Re

al

Es
t

at

ls

e

0%

Source: S&P Global Trucost (2021)

However, diverse results are evident within the overall misaligned picture. A varietyof scenario alignment results are evident within each Global Industry Classification
Standard (GICS) sector, indicating an ability of investors to identify a significant
number of well-aligned corporations among the universe of listed corporations,or avoid holding poorly aligned corporations, while still maintaining a good levelof diversification.

24

What Does Trucost's Paris Alignment Data Tell Us?

Sectoral differences are notable in the alignment results. Energy sector companies, including companies operatingin the oil and gas production value chain, have the weakest level of alignment overall by a significant margin.
Materials companies (cement, steel, aluminum) also underperform other sectors.
Better results, in general, are evident for the real estate sector, as well as financial and health care, with typicallylower direct emissions. Some new economy technology sectors also show better results, in contrast with old
economy heavy industrials and materials sectors, where emissions are generally high and cost-effective abatement
technologies have been more challenging to develop. The automobiles manufacturing sector has an average
performance, with a third of companies being Paris aligned.
One key element is the significant proportion of utilities that are aligned with the Paris Agreement. This relatively
strong performance draws out a key point: some large emitters can be very well aligned under transition pathway
assessment approaches, which can seem counterintuitive. High emissions-intensive companies are often thelargest targets of investor engagement, as well as broader stakeholder pressure, and some are reducing theiremissions sharply. In a significant proportion of these cases, this appears adequate to meet Paris-aligned
thresholds. Power generators have, in recent years, been rapidly switching from coal to natural gas, as well as
growing their adoption of renewable energy. This adds further context to investors' potential actions from portfolio
carbon analysis: a company may be a high emitter, but may also be on a very strong improvement trajectory andpaying more than its proportionate share toward achieving the Paris Agreement. Enabling further granularity
and nuanced distinctions between carbon intensity and adequacy of decarbonization trajectory is one way that
Trucost's Paris Alignment dataset can offer investors value and insights that are largely uncorrelated with signals
from other carbon analytics.
Among all sectors, though, there are strong performers that are well under their implied carbon budgets, alongsidecompanies that are significantly misaligned.
Figure 7: Under/over budget metric — best, worst and average performers by sector
Magnitude of 2°C alignment/misalignment by GICS sector

Over budget

Most misaligned company in sector (over 2°C carbon budget)

400,000,000

200,000,000

Under budget

0(200,000,000)(400,000,000)

Mean

MedianMaximum

ia
ls
M

at
er

s
tie
ili
Ut

er
En

du
s

tr

ia

gy

ls

e

io

n

In

Es
t
al

ch
no
Te

at

gy
lo

ic
rv
at
rm
fo

un
Co

m

m

m
ns
u
Co

Se
n
io
at
ic

Di
er

ns
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25

Re

ls
nc

Fi

sc

na

na
r
re

tio

St
ap
er
um

ia

y

s
le

re
Ca
th
al
He

Minimum
Source: S&P Global Trucost (2021)

es

Best aligned company in sector (under 2°C carbon budget)(600,000,000)

InOver/under 2°C budget (tons of CO2e)

600,000,000What Does Trucost's Paris Alignment Data Tell Us?

Geographic differences are also evident in the results (see below), with a stronger alignment with issuers indeveloped markets compared with emerging markets. Overall, the greatest misalignment in issuers is generally
in emerging markets and those with economies most oriented toward resource extraction or listings of resource
extraction companies. Better average levels of alignment are generally evident within countries with moreenvironmental regulations, such as Europe.
Figure 8: Paris Alignment by country and region*

Over budget

Magnitude of 2°C alignment/misalignment by country of domicile

50,000,000

40,000,000

30,000,000

20,000,000

Under budget

Over/under 2°C budget (tons of CO2e)

Average (mean) company in country coverage (over 2°C carbon budget)

10,000,000

0Median company in country coverage (over 2°C carbon budget)(10,000,000)

Mean

ng

a

Ko

di
H

on

g

In

Br
az
il
Ca
na
N
da
et
he
rla
n
Au ds
st
ra
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in

Ja
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ly

Sp
a

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ce
itz
er
So lan
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iw
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,P
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nc
en
e
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ite
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om
ite
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es
Fi
nl
an
d

Of

Fr

lic

ub

ep

Ko

re
a,
R

Ge

rm
an

y

(20,000,000)

MedianSource: S&P Global Trucost (2021)*Chart includes only coverage based on full company disclosure (including no modeled variables), and for countries with at least 25 companies fitting
this requirement.

26

Investor Applications: Case Study of Natixis Investment Managers Solutions

5. Investor Applications:
Case Study of Natixis
Investment Managers
Solutions
In a continuous low interest rate environment, institutional investors are increasingly
drawn to alternative asset classes, with a focus on illiquid and private assets (e.g., realestate, infrastructure, private debt and private equity). Natixis Investment Managers
Solutions17 recognizes this investor orientation and its impact on climate analytics,
and integrates this into investment solutions using Trucost data.
Where temperature alignment methodologies are increasingly used and scrutinized
as a way to assess climate impact, managing diversified assets naturally entails
crucial challenges. Historically, methodological discussions on temperaturealignment have focused on listed assets (listed equity and corporate bonds). Few,
if any, providers have covered other asset classes. As a result, most of the climate
assessments that have been made at a portfolio level have tended to omit thediversification pocket on grounds that data were non-existent or methodologies
inconsistent. Unfortunately, with diversification pockets currently observed to be
growing at levels of up to 20% or even 30% of the total allocation, this could lead tosignificant distortion in the assessments.
The current priority is to make sure that the assessment is able to cover all activities
and, in particular, all asset classes. For asset owners as well as asset managers,
extending the alignment assessment methodology to private asset classes is now
critical for the following reasons:• Reporting/regulatory requirements: Having one unified and consistentmethodological approach across asset classes supports better readability of thevarious assessment results reported in the current required frameworks.
• Allocation: Strategic Asset Allocation (SAA) decisions are affected by assumptions
regarding both risks and returns. As proportions of illiquid/unlisted assets keepincreasing, a SAA that properly incorporates climate risk conceptually requiresconsistent risk analysis across all those asset classes.
• Integration: Based on the “climate-consistent” SAA approach, full and proper
climate integration can be achieved at all stages of the asset allocation process:• Climate factors can be integrated in fundamental research to better adjust
financial forecasts (by identifying additional sources of risks and opportunities)
and help make more informed investment decisions.

17

Natixis Investment Managers Solutions: Natixis Investment Managers Solutions teams, based in several locations (Paris,
London, Geneva, Boston), gather the asset allocation, portfolio construction, multi-asset portfolio management andstructuring expertise of Natixis Investment Managers. Only the entity based in Paris has the portfolio managementcompany certification.

27

Investor Applications: Case Study of Natixis Investment Managers Solutions• Negative and, more importantly, positive screening can be implemented in the tactical allocation process(again, including in the diversification pocket) with a robust approach, with the investor actively choosing toinvest in companies with the perceived best climate performance.
• Ultimately, a comprehensive, consistent and quantifiable climate framework for all asset classes should help
measure and quantify climate impacts along with financial performance.
• Engagement: Consolidating data on sectors and stakeholders, which have received little attention due to theprivate nature of these investments, could prove a significant boon for engaging companies that are invested in
the portfolios and challenging their climate record.
• Risk Management: The focus on transition and physical risk exposure of the assets in a portfolio is, of course,
also key. This is especially the case for illiquid and unlisted assets, which are vulnerable to carbon price risk,
reputation risk, technology risk and/or market risk.

28

Conclusion

Conclusion
Since the adoption of the Paris Agreement, a growing number of institutional
investors have decided to align their strategies with the goals of that agreement.
They are committed to measure, report and take actions on the alignment of theirportfolios with the Paris Agreement. In 2005, Trucost helped design the first ever
portfolio carbon footprint report for an equity fund. Carbon footprint calculations
serve as a basis for the assessment of company trajectories. Fifteen years later,
Trucost is proposing a comprehensive, multi-asset and coherent methodology to help
investors assess and report on their portfolio alignment.
Trucost recommends the use of the SDA-GEVA approach. This approach enables
investors to analyze almost all asset classes, including both liquid asset classes(e.g., public equities, corporate fixed income) and illiquid asset classes (e.g., private
equity and private debt). This methodology also encompasses a number of key
advantages, including the use of various sources (targets, asset-level data andpast intensity trend) to calculate future carbon emissions. Although challenges
remain, in particular with respect to the availability of raw carbon data on privatecompanies, the methodology described in this white paper can be used by any
investor looking to align its strategy with the Paris Agreement and report accordingly.
Finally, as described in the above case study from Natixis Investment Managers,
Paris alignment assessments can be used in the following functions: Strategic Asset
Allocation, ESG Integration, Engagement and Risk Management.

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