A systematic tool to help identify leaders and laggards in the low carbon transition

In brief

  • The Paris Agreement outlines the actions needed to address the threat of climate change. Important implications for equity and fixed income investors that have a decarbonization objective for their portfolio are: (i) Greenhouse gas (GHG) emissions need to reduce, (ii) decarbonisation rates will vary across the economy, (iii) decarbonisation is complementary to climate adaptation and climate resilience, and (iv) transparency is essential.
  • J.P. Morgan Asset Management has developed a Carbon Transition Score that incorporates the key implications of the Paris Agreement. This portfolio management tool may identify those companies that are leaders and laggards in the low-carbon transition, compared to their respective sector peer.
  • The Carbon Transition Score1 can be used alongside the EU Climate Benchmark regulation to help provide additional information for portfolios that seek to align to the goals of the Paris Agreement.2

Aligning investments with a low carbon transition

Investors who are seeking to align their investment decisions with the goals of the Paris Agreement may help enable the transition to a low carbon economy while also addressing the potential financial risks in their portfolios that may result from this transition.

There are many ways to answer the question “What does it mean for an investment to be aligned with the objectives of the Paris Agreement?”. In an attempt to provide comparability, transparency and prevent greenwashing , the EU has developed a Climate Benchmark regulation that outlines a set of technical standards for a benchmark to follow in order to either be considered a Climate Transition Benchmark (CTB), or, more ambitiously, a Paris-Aligned Benchmark (PAB).3 While this provides an initial step for investors looking to align investments with a low carbon transition, it may lead to missed investment opportunities if investors only follow the technical standards based on current GHG emissions intensity.4, 5, 6, 7 A more holistic approach can be taken by combining the technical standards of the EU Climate benchmark with J.P. Morgan Asset Management's Carbon Transition Score. This proprietary tool leverages active insights and proprietary research to take into account a range of metrics beyond GHG emissions, and is designed to help identify low-carbon transition leaders across sectors. It provides an additional building block that can, for example, help provide additional portfolio insights within with the boundaries of the EU Climate Benchmark requirements.

This article outlines the key themes that we believe should be taken into account for clients that are wishing to incorporate the goals of the Paris Agreement into their investment objectives. We then provide an overview of the Carbon Transition Score and show how it is designed to meet the Paris Agreement’s core goals. Finally, we look at how the Carbon Transition Score can be used to help construct an equity portfolio and a fixed income portfolio, in order to illustrate how the score can work alongside the EU Climate Benchmark regulations to support achieving the Paris Agreement goals in practice.

1 Limitations of Data Disclosure: While J.P. Morgan Asset Management looks to data inputs that it believes to be reliable, J.P. Morgan Asset Management cannot guarantee the accuracy, availability or completeness of its proprietary system (including, without limitation, the JPMAM Carbon Transition Score) or third-party data. Under certain of J.P. Morgan Asset Management’s investment processes, data inputs may include information self-reported by companies and third-party providers that may be based on criteria that differs significantly from the criteria used by J.P. Morgan Asset Management, which often include forward looking statements of intent and are not necessarily fact-based or objectively measurable. In addition, the criteria used by third-party providers can differ significantly, and data can vary across providers and within the same industry for the same provider. Assessment of the data may also require subjective judgements. Such data gaps or applied subjective judgements could result in the incorrect, incomplete, or inconsistent assessment of data, an issuer’s carbon transition risks and opportunities.
2 The Carbon Transition Score is designed for internal use by J.P. Morgan Asset Management only as a portfolio management tool and is not provided directly to clients or third parties. The Carbon Transition Score is used only in certain strategies and, unless otherwise required by the applicable client guidelines or product offering document, is not required to be used or accessed by J.P. Morgan Asset Management portfolio management teams.
3 “Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks”, Official Journal of the European Union L 317/17, pp.17-27 (9 December 2019). https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32019R2089
4 Institutional Investors Group on Climate Change, “Enhancing the Quality of Net Zero Benchmarks”, IIGCC (2023).
5 2° Investing Initiative, “EU Climate Benchmarks Factsheet: Technical Analysis of Key Elements of the Climate Benchmark Standards and Potential Solutions”, 2DII (May 2020).
6 Mercer, “A Landscape Overview of Transition-Oriented Climate Indexes”, Mercer Canada (2022).
7 Amenc, N., Ducoulombier, F., “Unsustainable Proposals: A Critical Appraisal of the TEG Final Report on Climate Benchmarks and Benchmarks’ ESG Disclosures and Remedial Proposals”, Scientific Beta (February 2020).