This week we are launching a tool for financial advisors and wealth managers that assesses the warming potential of a portfolio, using current emissions intensity and forward-looking emissions reduction commitments made by thousands of companies.

The tool calculates the degrees Celsius increase in global temperature that a portfolio is aligned with, from 1.5°C or lower to 2.5°C or higher. The calculation is based on the weighted-average of warming potential (in degrees Celsius) of portfolio holdings, including stock and fund holdings.

Portfolio screens
Compare the warming potential of any two portfolios on Ethos

Through the 2015 Paris Agreement, world governments committed to curbing global temperature rise to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C. In 2018, the Intergovernmental Panel on Climate Change warned that global warming must not exceed 1.5°C to avoid the catastrophic impacts of climate change.

To assess individual company commitments to reduce emissions, we rely primarily on the Science-Based Targets Initiative (SBTI). The SBTI provides an independent assessment and approval methodology to determine whether a company's targets are in line with limiting the worst effects of climate change.

Companies submitting targets to the SBTI can have their targets validated in line with several global pathways for limiting warming, including 1.5°C, "well-below" 2°C, or 2°C.

Portfolio screens
See which portfolio holdings are in line with a 1.5°C pathway and which are not, based on SBTI commitments

Many companies that have not committed to SBTI targets have released other public statements about their commitment to “net-zero” emissions or carbon neutrality before 2050. While many of these commitments are ambitious, they are generally difficult (if not impossible) to validate as being in line with a 1.5°C or 2°C pathway. Because these commitments have not been validated by the SBTI, Ethos assigns them a "default" degrees Celsius potential of 2.1°C. This is well below the current path that the world is on but not in line with the 1.5°C needed.

Ethos believes the public, open methodology for target-setting that is being developed by SBTI and partner organizations (such as CDP, the World Wildlife Fund, the United Nations Global Compact and the World Resources Institute) offers the best way to reliably assess corporate targets. We need to be able to measure and validate targets in order to be confident in their efficacy.

For companies that have not made a public commitment to reduce their emissions, Ethos estimates the warming path they are on based on their current emissions intensity (scope 1, 2 and 3 metric tonnes of CO2 per $1M USD in sales). To set warming pathways we use data from Climate Action Tracker that estimates the total amount of global CO2e that can be released per year between now and 2100 to meet 1.5°C and 2°C scenarios, and we combine this data with global GDP projections to estimate average emissions intensities that are aligned with varying warming scenarios. 

For example, a 2°C pathway requires that global CO2e be reduced from the 2020 level of ~48.5 Gt CO2eq to ~27 GT by 2040 (based on data from Climate Action Tracker). Given projected global GDP of ~$176T in 2040, average allowable emissions intensity for a 2°C pathway is ~154 metric tonnes per $1M USD sales. 

Because this analysis considers companies that have not set SBTI targets, we compare their current emissions intensity with allowable intensities for 2050 (the generally-agreed timeframe when the world must reach net-zero emissions in order to limit warming to 1.5°C).

If a company does not have a target and its current emissions intensity puts it on a warming path above 3.2°C, we give it a "default" target of 3.2°C. This target is based on 2100 warming projections from Climate Action Tracker that consider current corporate pledges.

For portfolio fund holdings, the tool first calculates the warming potential of each held fund based on the weighted-average of fund holdings, then includes the fund in the portfolio calculation.

If your clients are concerned about global warming and want to be sure they are investing in line with a sustainable future, try showing them the warming potential of their portfolio through Ethos. You can sign up for a free 7-day trial here.