Choosing a climate risk metric
Why J.P. Morgan Asset Management uses weighted average carbon intensity in its fund reporting.
A range of metrics exists to measure an investment portfolio’s carbon emissions characteristics —an important starting point in understanding a portfolio’s exposure to climate risks. Of the group, we’ve chosen to monitor and manage climate risks and opportunities in investment portfolios using weighted average carbon intensity, which lets us understand, and disclose to clients, our portfolios’ exposure to climate change-related risk.1
It builds on three other MSCI metrics, described below. What we find makes weighted average carbon intensity most useful is that it’s fairly simple to calculate; it’s not sensitive to share price movements (since it’s not based on ownership); it can be measured across asset classes, including fixed income; and at the portfolio level it enables simple attribution analysis and portfolio decomposition.2
For those reasons, weighted average carbon intensity is currently used in fund reporting, but there are caveats. Weighted average carbon intensity applies only one lens and is backward-looking—it doesn’t encompass company policies and other forward-looking information. Excluded from weighted average carbon intensity analysis are short positions, sovereigns, derivatives, securitized products and bonds issued by trusts.
MSCI metrics may not fully reflect future economic reality. Our ESG specialists collaborate closely with our research analysts to understand when that may be the case, and where appropriate we engage with companies to improve disclosure and enhance policies. Where we think climate risk may be material, we review fossil fuel exposure, disclosed reduction targets going forward and other relevant information.
1It is also recommended by the Task Force on Climate-related Financial Disclosures (“Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures” (2017), pp. 36-37).
2Note that for certain portfolios focused on sustainability, carbon footprint may be a better indicator of impact.