Investors rebuff carbon metrics as optimum measure of net zero transition risks

Carbon metrics on their own do not have the forward-looking insights needed to quantify the financial risks and opportunities of transitioning to a low-carbon economy, according to a poll of investment professionals conducted by WTW.

In an effort to hit net-zero targets, regulators across the globe are increasingly requiring investors to disclose their climate-related financial risks and companies to report their carbon emissions. But 85% of respondents to WTW’s survey rejected carbon metrics as the best measure to assess the financial risks of the low-carbon transition to their investments, WTW found.

Survey respondents also ranked the most significant barriers to greater adoption of environmental, social and governance principles across their investment portfolios. Data quality and consistency topped the list (66%), followed by availability of tools and metrics to accurately measure transition risk (41%) and a lack of conviction that ESG integration will improve performance over the long term (41%).

“Investors are hungry for data on how climate risks impact investment outcomes,” said Diya Luke, growth acceleration leader at WTW. “We now have forward-looking metrics that shine light on all the climate-related financial risks across industries. This includes quantifying the difference between current market expectations of future cash flows and those under different climate transition scenarios. This is a step change in understanding the impact of the net zero transition on companies, portfolios and even countries. These analytics move the market beyond current carbon metrics and will help capital align with net zero.”

Climate Quantified, WTW’s suite of climate data and analytical tools, includes the latest physical risk models and the Climate Transition Value at Risk methodology, which helps companies, investors and countries identify and manage the risks and opportunities of the climate transition.