Capital flows towards sustainable change: How effective is the use of climate data in asset management today? A white paper highlights the challenges and key considerations in selecting and using climate metrics.
Climate change poses enormous risks to the economy and society. The path to greater sustainability will require substantial investment over the coming decades. Financial markets face the challenge - not least in their own interests - of targeting investment towards sustainable and climate-friendly projects.
Effective investment decisions require a solid foundation in the form of reliable climate metrics. A white paper by INFRAS and Inrate analyzes the challenges and possible solutions.
Limited impact of current climate metrics
The climate metrics commonly used in the financial sector - such as carbon footprint, intensity indicators, or implied temperature rise (ITR) - are limited in their ability to effectively steer capital flows toward climate action. A key problem is that many of these metrics focus on direct (Scope 1) emissions. The often much more significant indirect emissions along the value chain (Scope 3) are rarely considered.
In addition, financial indicators such as revenue or enterprise value are often highly volatile and drive the emission data more than actual absolute emission reductions. Focusing on individual sectors or companies with low emissions is also insufficient - what is more important is how companies and entire industries contribute to the transformation.
A holistic view is needed, not silo thinking
The white paper recommends a systemic approach to assessing climate risks and opportunities in portfolios. Rather than focusing on individual indicators, investors should consider the entire value chain, cross-sectoral dependencies, and actual potential for change.
This includes, for example, analyzing investments in climate-friendly technologies, the electrification of production processes, and the promotion of the circular economy. This is the only way to identify the relevant levers for sustainable transformation and to finance them in a targeted manner.
The financial sector is not a savior - but an enabler
The financial sector alone cannot stop climate change. However, as an enabler and guiding force, it can play a essential play a role by directing capital in the right direction. However, this requires robust, comparable, and sector-specific data, as well as a deep understanding of the industry.
INFRAS and Inrate are working to develop such indicators and evaluation frameworks for greater impact and transparency in sustainable investment.
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