Scientific Beta welcomes the update of the TCFD guidelines and renews its criticism of the EU’s climate transition and the benchmark regulation aligned with Paris

Press release – Boston, London, Nice, Paris, Singapore, Tokyo, October 21, 2021

Scientific Beta welcomes the update of the TCFD guidelines and renews its criticism of the EU’s climate transition and the benchmark regulation aligned with Paris

Index provider reiterates warnings against using carbon intensity based on company value and considers incorporation of temperature rise measures implicit in portfolio construction as premature

On October 15, 2021, the Task Force on Climate-related Financial Disclosures (TCFD) updated its 2017 guidelines on the implementation of its recommendations to promote more informed financial decisions in relation to the risks of climate change.1

Updated guidelines:

  • Promotes more granular or explicit disclosure of risks and opportunities identified by reporting organizations and their impact on their strategies

  • Introduced significant revisions to the metrics and targets disclosures to:

    • Encourage the adoption of relevant indicators in all sectors and related targets

    • Require disclosure of Scope 1, Scope 2 and significant Scope 3 emissions

    • Require the financial sector to disclose its funded emissions and the extent to which its activities align with the goals of the Paris Agreement

With respect to additional guidance for the financial sector on the Metrics and Targets pillar of the recommendations, Scientific Beta welcomes two major changes from the draft proposals on which the TCFD requested comments. First, TCFD reaffirms Weighted Average Carbon Intensity as Recommended Disclosure2 for funds, products and strategies (while also requiring disclosure of funded programs, where possible). Second, it takes a more cautious approach to disclosing alignment with Paris Agreement-compliant temperature scenarios.

“The TCFD is to be commended for taking an evidence-based stance on evolving metrics and goals and for overturning proposals that would have provided additional incentives for counterproductive actions by investors,” commented Frédéric Ducoulombier, director of ESG, who wrote Scientific Beta’s contribution to the TCFD. consultation.

“TCFD’s cautious approach to portfolio alignment suits the lack of maturity and convergence of methodologies in this area and we applaud the work commissioned by the organization to attempt to lay the groundwork for tool development. robust and convergent portfolio alignment, ”says Ducoulombier.

“While there is understandable interest in financed emissions as a potential carbon footprint approach for various financial activities and investments, it should not be allowed to guide stock selection and issuer engagement,” in particular because its dependence on enterprise value introduces volatility in the capital market in the measurement of carbon intensity. and obscures the relationship to real-world broadcasts, as we have documented in published research3. While not perfect, revenue-based carbon intensity, as approved by the TCFD since 2017, is a superior metric for these applications, ”he adds.

“The integration of climate considerations into the management of investments must be based on solid data and appropriate measures and methodologies, whether its primary objective is the management of climate-related risks and opportunities or the promotion of change mitigation. climate in the real world. The European regulator got it wrong and bears responsibility for the proliferation of greenwashing strategies claiming European labels, ”said Scientific Beta CEO Noël Amenc, who co-wrote a February 2020 report with Ducoulombier which warned against the unintended consequences of European regulations. in the making.4

“It is therefore a source of comfort and hope that the TCFD, despite a difficult political context, has chosen to revise its orientations in a way that preserves the metrics established and relevant for climate-related investments, reinforces the information at the level of the issuers they are on and takes a cautious and multi-pronged approach to strengthen the foundations for the integration of forward-looking climate-related data into investment management, ”he adds.

1 The TCFD was created by the Financial Stability Board, an international body that monitors and makes recommendations on the global financial system. Financial regulators around the world have endorsed the TCFD recommendations, with the European Union, Japan, UK, Brazil, Switzerland, Singapore and Hong Kong having defined or announced they will set aligned reporting requirements on the work of the TCFD. TCFD recommendations are organized around four pillars: Governance, Strategy, Risk Management and Metrics and Targets.
2 The TCFD distinguishes between recommended indicators that financial institutions “should disclose” and additional measures of carbon exposure and carbon footprint that they “should consider” for reporting. The weighted average carbon intensity (WACI) defined as the average, based on the portfolio weights, of the ratios at the emitter level of the greenhouse gas emissions of scopes 1 and 2 in relation to income was the only indicator recommended until now. ‘to the October 2021 update (which added financed emissions to be calculated according to standards being developed by the Partnership for Carbon Financial Accounting (PCAF)). The draft guidelines proposed to require disclosure of “programs funded in accordance with the CFP methodology and WACI, where applicable (…)
3 Carbon intensity hits a net zero, Frédéric Ducoulombier and Victor Liu, The Journal of Impact & ESG Investing, Spring 2021, Volume 1, Issue 3, pp. 59-73.
4 Unsustainable proposals: a critical assessment of the TEG final report on climate benchmarks and ESG disclosures of benchmarks and corrective proposals, Noël Amenc and Frédéric Ducoulombier, Scientific Beta, February 2020.

About the science beta:
Scientific Beta aims to be the premier provider of a smart factor and ESG / climate index platform to help investors understand and invest in advanced factor equity and ESG / climate strategies. Created by the EDHEC-Risk Institute, one of the first academic institutions in the field of fundamental and applied research for the investment industry, Scientific Beta shares the same concern for scientific rigor and veracity, as it does applies to all the services it offers to investors and asset managers.

On January 31, 2020, Singapore Exchange (SGX) acquired a controlling stake in Scientific Beta. SGX maintains the close collaboration with EDHEC Business School and the principles of independent and empirical academic research, which have so far benefited the development of Scientific Beta. Since 2015, Scientific Beta has also offered very advanced strategies in the field of ESG and climate change, whether these are options integrated into smart beta indices or pure or climate ESG benchmarks.

In addition to its own research, Scientific Beta supports a major research initiative developed by EDHEC on ESG and climate investment and cooperates with VE and ISS ESG for the construction of its ESG and climate indices.

Scientific Beta, 1 George Street, # 15-02, Singapore 049145. For more information, please contact: [email protected], Web: www.scientificbeta.com.


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