The Temperature Alignment metric
The temperature alignment of a portfolio is based on the portfolio's carbon intensity. It captures the temperature scenario that a portfolio is currently in line with, based on its current carbon footprint.
The temperature alignment of a portfolio is based on the portfolio's carbon intensity. It captures the temperature scenario that a portfolio is currently in line with, based on its current carbon footprint. It is currently applied only on the equity component of the portfolio.
The temperature alignment is calculated from its carbon emissions and the current carbon budgets associated with three globally acknowledged climate scenarios: 1.5°C, 2.0°C, and 4.0°C. These scenarios have been adopted by international climate science bodies.
We also analyse and monitor the temperature alignment of individual companies and assets within the portfolio. We can create what a future trajectory would look like if the company didn't change its emissions but carbon budgets became tighter as we transition.
The lower the temperature alignment of a portfolio suggests that, overall, the companies and assets that comprise the portfolio are more aligned with a future low carbon world.
Is a high temperature alignment 'bad'?
Portfolios that have high temperature alignments should not automatically be thought of as 'bad' for the climate. First, we need to understand what underlying investments are driving that higher temperature. For example, some of Aurora Capital's KiwiSaver portfolios have relatively high exposures to sectors and companies that are actively transitioning away from carbon to renewable energy over the medium term. These sectors and companies can have a higher carbon intensity and temperature alignment than companies that have already moved to renewable energy.
As long as companies stick to their decarbonisation plans, the carbon exposure of these companies will reduce over time. Like we always say, change is a journey.
We use independent third-party carbon analytics specialist, EMMI, to provide temperature alignment data.
LAST UPDATED 13 OCTOBER 2022