Many investors aspire for their portfolios to contribute to the Paris Agreement goal of limiting global warming to well below 2C. For these investors, the most common approach is to set a net-zero target at the portfolio level based on carbon footprint, weighted average carbon intensity, or a similar metric. In theory, a single, portfolio-level metric is appealing because it is easy to track and compare across portfolios.

In reality, though, managing to a single, portfolio-level metric often produces results that are counterproductive to real-world decarbonisation. Critically, this approach creates incentives to withhold capital from the issuers most likely to develop key decarbonisation solutions and rewards issuers who have low emissions to begin with, even if this is simply because they operate in industries with naturally lower emissions.

Simplistic metrics ignore critical considerations. For instance, they fail to consider an issuer’s decarbonisation strategy, or how the emissions trajectory implied by its targets compares to the pathway required to align with a given temperature goal. They fail to account for the differing social value of issuers’ products (e.g., private jets and budget airlines would be treated equally), or a company’s attempts to influence climate policy. And they do not account for positive externalities—such as issuers leading the way in developing valuable new technologies and infrastructure that will enable broader decarbonisation—or negative externalities—such as issuers encouraging systemic lock-in of fossil fuel assets.

These flaws are compounded when assessing issuers in non-corporate asset classes, such as sovereigns and securitised products. All asset classes have their own, unique nuances, which are significant enough to warrant a bespoke approach for each. In contrast, the goal of having “one number” across all asset classes leads to the use of questionable proxies for emissions that can result in ineffective, or even harmful, outcomes.

Additionally, single metrics also give an appearance of precision when the reality is far messier. They can swing wildly due to market movements, M&A activity, or a temporary slump/bump in sales, even if the underlying decarbonisation performance is steady. They are often based on data that include numerous estimates with huge margins of error that often go undisclosed. They are sometimes not based on emissions at all, but rather proxies for emissions, and these substitutions can also be unclear.

For investors that want to support real-world decarbonisation through their portfolios, carbon footprint alone will not suffice. This paper explores why and begins to offer outlines of an alternative, which we will build upon in future publications.