Different timescales have been applied, depending on the risks and opportunities factored into the climate analysis on the respective portfolios and the asset classes concerned.
Driven by its conviction that what is not measured cannot be managed, ERAFP was one of the first investors to calculate and publish its carbon footprint, in its 2013 annual report. ERAFP measures its portfolios’ exposure to carbon risk by calculating the average carbon intensity (CO2 emissions normalised by revenue) of the constituent companies or countries, weighted for their respective weights in their portfolios. The advantage of this metric is that it can be applied to all assets in the portfolio, but the drawback is that it is based on past data.
ERAFP also measures its portfolios’ “green share”, an indicator of their associated climate-related opportunities. In 2019, the green share of its listed bond and equity portfolios was measured on the basis of the percentage of renewable energy in the energy mix of electricity producers. However, this metric also gives a static view.
To overcome this limitation, ERAFP also evaluates its portfolios’ alignment with a “2°C” scenario. This evaluation facilitates the measurement of, for example, a 2°C carbon budget ratio and an equivalent temperature to 2023, based on the past and future carbon emission trajectories of issuers held in its listed equities portfolio. Calculations of carbon budget ratios and equivalent temperatures are based on several 2°C alignment scenarios (relied to SDA and GEVA methodologies) that establish trajectories through to 2100.
To evaluate its transition risks, ERAFP measures the exposure of its asset valuations to the risk of changes in carbon pricing in 2030, based on the representative concentration pathways (RCP 2.6 and 4.5) adopted by the IPCC.
Lastly, physical risks are measured based on the exposure and vulnerability of its assets to seven physical risks (water stress, fires, floods, heat waves, cold waves, hurricanes and rising water levels). Evaluations are performed on the basis of three climate scenarios (low, moderate and high levels of global warming), that are in turn based on the IPCC’s representative concentration pathways (RCP 2.6, 4.5 and 8.5). The results are expressed for a time horizon to 2050 (but are also calculated for 2020 and 2030).
The climate analysis methodologies are tailored to each asset class. ERAFP does not yet publish results for its infrastructure and private equity portfolios because we do not consider the data to be sufficiently robust. However, we have been working on analysing these portfolios, together with Carbone 4, since 2017.