The TPI has emerged as a key investor tool for assessing transition risk, write Rory Sullivan and Valentin Jahn
The Transition Pathway Initiative Global Climate Transition Centre (TPI Centre) – based at LSE's Grantham Research Institute on Climate Change and the Environment – is an independent, authoritative source of research and data on the progress of the financial and corporate world in transitioning to a low-carbon economy. Led by asset owners and supported by asset managers, TPI's vision is to provide assessment frameworks, based on publicly disclosed information, that enable investors to objectively and robustly assess corporate and sovereign practices and processes. TPI is the main research partner and data provider for the CA100+ Net Zero Company Benchmark.
The core TPI research product assesses companies – primarily listed companies but also selected large fixed income issuers – on their management and governance of transition-related risks and opportunities, and on how their current and future greenhouse gas emissions compare to relevant low carbon benchmarks. In total, TPI covers approximately 600 companies, across 16 high carbon sectors including coal mining, oil and gas, electric utilities, autos, aviation, shipping, steel, cement, paper, aluminium and chemicals. TPI also covers banks and has recently launched a consultation regarding the assessment of sovereign bond issuers.
Management Quality
TPI's Management Quality framework assesses companies' governance of greenhouse gas emissions. It assesses companies against 19 Yes/No indicators which cover policies, reporting, target-setting and responsibilities and accountabilities. Each metric is assessed on a Yes/No basis based on information and evidence published by the company.
The results are used to map companies on to five levels as follows (see diagram):
- Level 0: Unaware of (or not acknowledging) climate change as a business issue.
- Level 1: Acknowledges climate change as a business issue: the company acknowledges that climate change presents business risks and/or opportunities, and that the company has a responsibility to manage its greenhouse gas emissions.
- Level 2: Building capacity: the company develops its basic capacity, its management systems and processes, and starts to report on practice and performance.
- Level 3: Integrating into operational decision-making: the company improves its operational practices, assigns senior management or board responsibility for climate change and provides comprehensive disclosures on its carbon practices and performance.
- Level 4: Strategic assessment: the company develops a more strategic and holistic understanding of risks and opportunities related to the low-carbon transition and integrates this into its business strategy and capital expenditure decisions.
Companies need to be assessed as 'Yes' on all of the questions pertaining to a level before they can advance to the next. Companies that are assessed as 'Yes' on all the Level 4 questions (and thus all questions in the framework) are described as '4* companies'.
TPI is currently developing an additional level, reflecting recent advances in the corporate climate discourse, focusing even more clearly on the actions companies are taking to meet their climate targets.
Carbon performance
TPI's Carbon Performance assessment is based on the Sectoral Decarbonization Approach (SDA) which translates greenhouse gas emissions targets made at the international level (e.g., under the Paris Agreement to the UN Framework Convention on Climate Change) into appropriate benchmarks, against which the performance of individual companies can be compared (see diagram).
The SDA approach recognises that different sectors of the economy (eg. oil and gas production, electricity generation and automobile manufacturing) face different challenges and different costs arising from the low-carbon transition.
TPI independently, credibly and transparently reduces the complexity of the low carbon transition to terms that allow asset owners and asset managers to robustly assess transition risk
The SDA, therefore, takes a sector-by-sector approach, comparing companies within each sector against each other and against sector-specific benchmarks, which establish the performance of an average company that is aligned with international emissions targets.
For most sectors, TPI uses the International Energy Agency's work to derive sectoral benchmarks or pathways; one exception is the food sector, which uses IPCC scenario data. TPI provides the following sectoral benchmark pathways/scenarios:
- A 1.5 Degrees scenario, which is consistent with a carbon budget that limits the global mean temperature rise to 1.5°C with a 50% probability.
- A Below 2 Degrees scenario, which is consistent with a carbon budget that limits the global mean temperature rise to 1.65°C with a 50% probability.
- A National Pledges scenario, which is consistent with the global aggregate of emissions reductions pledged by countries up to at least mid-2020, depending on the sector. According to the IEA, this aggregate is currently insufficient to put the world on a path to limit warming to 2°C, even if it will constitute a departure from a business-as-usual trend. This scenario is consistent with a carbon budget that limits the global mean temperature rise to 2.6°C by 2100 with a 50% probability.
Benchmarking is sector-specific and based on emissions intensity (e.g. for electricity utilities, it is tonnes of CO2 per MWh electricity generated).
TPI's assessments are made publicly available through the TPI website at: https://www.transitionpathwayinitiative.org/sectors. Through the TPI toolkit, investors can assess:
- How a company compares to its sector peers.
- How a company's performance compares to one of the three sectoral benchmark pathways/scenarios above.
- Whether a company's future emissions performance (or its stated short, medium and long-term targets) is aligned with the goal of limiting warming to 1.5°C at a specific point in time.
- Whether a company's trajectory broadly follows the decarbonisation trajectory necessary to align with the goal of limiting warming to 1.5°C.
- How far a company's performance diverges from the goal of limiting warming to 1.5°C (this is a measure of the level of additional emissions reductions that the company will need to deliver).
How investors use TPI
Investors use TPI data in a variety of ways, including:
- To assess whether their holdings align with the pathways set by the Paris Agreement.
- As an explicit input to their portfolio construction or risk management processes.
- As a basis for their company engagement (noting that TPI is also the data provider for the CA100+ initiative).
- To shape their approaches to proxy voting.
- To define certain of their exclusion policies.
- To create climate-sensitive financial products. One notable example is the FTSE TPI Climate Transition Index.
- To support their investee due diligence procedures.
Drivers of TPI's success
A number of factors have underpinned TPI's success and uptake by the investment industry.
First, TPI was designed by asset owners for asset owners. TPI addresses the needs for asset owners to have a framework that they can rely on for assessing what the transition to a low-carbon economy looks like for individual companies and sectors, and for asset owners to have a trusted tool for assessing the low-carbon strategies of individual companies.
Second, TPI is a credible source of information. TPI only uses publicly disclosed data, all of the data and methodologies are publicly available, and all data are rigorously reviewed and checked, including a formal company review process.
Third, TPI data are publicly available and free to use. Third, TPI is completely transparent. All of the data are available on TPI's website, the underlying methodologies are transparent and the data are provided in Excel format so that they can be easily downloaded and used by others.
Of course, TPI does not address all questions that investors might ask about a company's strategy. For those investors who want to dig deeper, additional commentary and insight can be obtained from the organisations who contribute to the CA100+ Benchmark (e.g. Influence Map on corporate climate lobbying, Carbon Tracker and Rocky Mountain Institute on capital expenditure alignment).
In addition, TPI is working with others to develop tools and methodologies that delve deeper into specific aspects of the low carbon transition. For example, TPI has supported the IIGCC with the development of its Net Zero Standards (NZS) – sector-specific frameworks developed to help Climate Action 100+ investors and other stakeholders assess the alignment of transition plans with a 1.5oC climate scenario. These net zero standards also deal with the question of "climate solutions" (i.e. the low-carbon technologies, infrastructure or other activities which help displace fossil fuels), which are not currently explicitly covered in TPI's Management Quality or Carbon Performance indicators.
Concluding comment
TPI's strength derives from the fact that it independently, credibly and transparently reduces the complexity of the low carbon transition to terms that allow asset owners and asset managers to robustly assess transition risk in their portfolios, and take action to manage these risks. Its influence derives from this credibility, from its asset owner and asset manager support, and from investors using TPI data to shape their investment decision-making and engagement activities.
Dr Rory Sullivan is CEO of Chronos Sustainability and Chief Technical Advisor to the Transition Pathway Initiative. Valentin Jahn is Lead Research Analyst at TPI and TPI CA100+ Project Lead.
Notes:
1. The Transition Pathway Initiative (TPI) was created in 2017 as a joint initiative of the National Investing Bodies of the Church of England and the Environment Agency Pension Fund, chaired by the Church of England Pensions Board. The Initiative is a global effort led by asset owners and supported by asset managers. Its mission is to assess the progress of large corporations on the transition to a low-carbon economy, supporting efforts by investors to address climate change.
2. The TPI Global Climate Transition Centre (TPI Centre) was established on 1 June 2022 at the LSE Grantham Research Institute on Climate Change and the Environment. The Grantham Research Institute has been the academic partner of the Transition Pathway Initiative since its inception. The TPI Centre is an independent, authoritative source of research and data on the progress of the financial and corporate world in transitioning to a low-carbon economy. =
3. In September 2022, TPI Ltd. a not-for-profit company listed in the UK was established with the mission to ensure the research agenda of Asset Owners is met and that sufficient funding in place to support the TPI Global Climate Transition Centre. The Initiative is supported by 131 asset owners, asset managers and service providers representing more than $50 trillion in combined assets under management and advice.
4. FTSE Russell is the TPI Centre's data partner, co-producing the Management Quality data. It is also the TPI Centre's partner in commercialising its data. With the Church of England Pensions Board, FTSE Russell has created the FTSE-TPI Climate Transition Index.
5. The funders of the TPI Centre are Climate Arc (a project housed at the Rockefeller Philanthropy Advisors (RPA), with initial funds from the Children Investment Fund Foundation (CIFF)) and the London Stock Exchange Group (LSEG) Foundation (the philanthropic arm of the LSEG).
