Methodology
Financial institutions (FIs) are yet to effectively align their decisions with climate risks and opportunities. A key reason for this is a lack of reliable and decision-leading data on corporate climate-related performance. Voluntary frameworks and mandatory requirements are starting to align on the key data points that companies should disclose to clarify their transition performance. However, FIs struggle to convert these data points to decision-leading information that can be integrated across all aspects of their investment and lending portfolios. Three of the most important reasons for this difficulty are set out below.
- Disclosure alone is insufficient to assess ‘what good looks like’, - i.e. whether a company is transitioning their operations in line with the requirements for an orderly transition set out by climate science (‘science-aligned’). For example, greenhouse gas emissions intensity data provides insight into how companies are performing versus their peers, but to assess whether companies are decarbonizing quickly enough, emissions need to be compared to a robust sector benchmark. There are several methodologies available for assessing this “what good looks like” aspect of corporate climate performance but consensus is lacking on the critical components of a transition assessment, and financial institutions have difficulty understanding the reasons for differing results for the same companies from these assessments.
- Detailed transition assessments that situate company performance against robust benchmarks are currently available for only a small number of companies. Though coverage includes companies with some of the largest climate footprints, coverage will need to scale up significantly to allow FIs to incorporate transition assessments into decisions at scale.
- Where assessments of corporate climate performance exist, the results are often not fully transparent. For instance, it may not be clear which company target has been assessed or where it can be found in the company’s sustainability report, or which sector pathway the target has been compared to.
To address these challenges, this platform aims to provide decision-leading information on corporate transition to FIs by bringing together the best available company transition analysis from a range of leading initiatives. Arc is also working with a growing number of partners who are feeding into the platform to expand company coverage, strengthen transparency and enhance comparability across different sources. Table 1 summarizes the existing problems and how the platform attempts to solve them:
| Problem | Solution |
|---|---|
| There are multiple methodologies for analyzing corporate transition plans from disclosed information which causes market confusion | Science-aligned methodologies and grading based on best available transition analysis |
| Disclosure is not widespread enough and analysis of corporate transition based on these disclosures is fragmented with overlapping coverage | Optimized data collection and expanded coverage |
| Data and methods are closed and/or not transparent, and published datasets are unstructured | Open and accessible, with interoperable data |