Issue #8 | September 2023
For years, an image has been cultivated of finance seemingly being able and wanting to play an active, if not decisive, role in combating climate change. From industry initiatives such as the CA100+, the PRI, the IIGCC, and the net zero alliances under the GFANZ umbrella to public sector institutions like the NGFS, and hybrid formats like the TCFD, finance has been setting itself up to meet one of the greatest challenges of the 21st century – but how is it going to deliver? And can it even know whether it is delivering? We argue that there is a need for greater clarity on finance’s theory of change of how climate goals can be achieved. Such clarity is pivotal for an evaluation of whether a given theory of change in fact delivers the desired outcomes.... Continue reading
Issue #7 | August 2023
In recent years, several net-zero alliances have sprung up in the financial industry. In this blog post, we view these net-zero alliances from a political theory perspective and ask how one might understand the kind of responsibility that financial institutions are taking when joining and participating in such alliances. Drawing on the political theorist Iris Marion Young, we suggest that financial institutions’ responsibility in climate change can be understood in terms of a “political responsibility” that aims to address structural injustices. This perspective entails two key insights for finance professionals and their stakeholders. First, the net-zero alliances can be understood as vehicles to achieve structural change in finance’s own practices and the practices of the economic entities that they finance. Second, to enable structural change, public deliberation that ensures the voices of external stakeholders are heard and taken seriously remains critical... Continue reading
Engagement: what can corporations and financial institutions learn from civil society organisations?
Issue #6 | June 2023
What can financial institutions (FIs) learn from civil society organisations when it comes to engagement? For Dr Felicia Liu,Link opens in a new window Lecturer in Sustainability at the University of York, the emergence of sustainable finance represents a reimagination of the objectives, the practices, and, ultimately, the impact of finance. To reimagine financial institutions as agents of change, Dr Liu looks into a space often neglected, i.e., the ways CSOs engage corporations and financial institutions. The Warwick Climate Finance Research team sat down with Dr Liu, and here she shares her insights from past and ongoing research, and her reflections on why reliance on current engagement models may be problematic... Continue reading
(Climate) Impact strategies for investors: what does academic research say about effective levers to achieve real economy impact?
Issue #5 | May 2023
As investors move towards implementing and making progress on their interim and long-term net zero commitments, the question arises what the most effective levers are to achieve real world impact. We discussed this question with our colleague Dr Emilio MartiLink opens in a new window, Assistant Professor at the Rotterdam School of Management. Emilio argues that perspectives from disciplines other than financial economics are important in finding answers to the multi-dimensional question of shareholder impact. Whilst mainstream investors and financial economists focus on portfolio screening and engagement as impact strategies, Emilio and his colleagues identify a third, hitherto underappreciated strategy of ‘field building’. Even more importantly, he suggests that shareholder impact is a distributed process that arises through the interactions of different impact strategies. Thus, to come to a better understanding of how investors can achieve their net zero commitments, there needs to be a greater recognition and appreciation of how different impact strategies interact and build on each other... Continue reading
Issue #4 | April 2023 (edited June 2023)
Can academic insights on “standards markets” help us make sense of developments around net-zero target-setting frameworks for financial institutions (FIs)? With looming regulation and mounting pressure from civil society groups, several net-zero initiatives or alliances have sprung up in recent years that have developed and continue to refine standards for how to set targets and achieve net zero by the year 2050. However, navigating the multiplicity of net-zero alliances together with their target-setting standards is a challenge. In this blog post, we provide an overview of the different alliances and standards. Drawing on academic insights about “standards markets” in other industries, we highlight some of the dynamics that underlie the emerging net-zero target-setting field for FIs, and we provide an outlook where the field might be heading... Continue reading
Issue #3 | March 2023
Implied Temperature Rise (ITR) tools that attempt to measure the temperature alignment of companies, portfolios and financial institutions are gaining momentum in the private climate finance space. ITR has become popular as it is a seemingly intuitive metric that captures the climate debate in one number and that allows communicating with various stakeholders. Most data and analytics providers now offer an ITR or temperature alignment solution. Many financial institutions feel they have to report a temperature score, and TCFD and GFANZ actively promote ITR. Yet, despite its wide support and appeal, ITR remains a contested and controversial tool. Our research uncovers that the main controversies surrounding ITR tools are rooted in the fact that a variety of different components that are not ‘ITR-specific’ are brought together to calculate a temperature score – a process we refer to as ‘stitching together.’ In this blog post, we map these controversies around ITR... Continue reading
Issue #2 | February 2023
Scope 3 emissions estimates are most probably here to stay, but they need to become more transparent. Despite the prevailing preference in financial markets for reported Scope 3 emissions data over provider-modelled estimates, we need to acknowledge that reported Scope 3 emissions are also largely estimated. In fact, the differences and inconsistencies of estimates are often exacerbated between those of providers, and those of reporting companies. For the time being, financial institutions will need to live with estimates. However, in order for them to make more confident decisions and assessments there is room for improvement in understanding estimates of both providers and reporting companies... Continue reading
Issue #1 | January 2023
How are green finance professionals actually “doing” green finance? How do they work with data and tools to understand topics such as climate risk and climate alignment? These are the questions the Warwick Climate Finance Research project has been busy seeking answers to since 2020. The Climate Finance Dispatch blog is the platform where we are sharing updates on empirical findings, theoretical and methodological insights, and fascinating stories from the field. The blog is for anyone with an interest in emerging practices and tools in finance dealing with the climate crisis... Continue reading
A call for clarity: what is finance’s theory of (climate) change?
For years, an image has been cultivated of finance seemingly being able and wanting to play an active, if not decisive, role in combating climate change. From industry initiatives such as the CA100+, the PRI, the IIGCC, and the net zero alliances under the GFANZ umbrella to public sector institutions like the NGFS, and hybrid formats like the TCFD, finance has been setting itself up to meet one of the greatest challenges of the 21st century – but how is it going to deliver? And can it even know whether it is delivering? We argue that there is a need for greater clarity on finance’s theory of change of how climate goals can be achieved. Such clarity is pivotal for an evaluation of whether a given theory of change in fact delivers the desired outcomes.
In this blog post we review the strategies most commonly discussed and employed in private finance to address climate change. We summarise questions regarding their efficacy that we have encountered and discussed with various finance professionals during our research. In light of the diverse strategies in use and their respective underlying theories of change, we note that both on the level of the individual financial institution, and the level of the sector as a whole there is a need for greater clarity which theory of change is being pursued. The blog post thus formulates a call for action for finance to
a) clarify their theory of change and their strategies building on this theory to subsequently
b) device ways to continuously and systematically assess the plausibility of their theory of change and the efficacy of their strategies.
We believe that these steps need to be carried out by both alliances and other collaborative fora in finance as well as by individual financial organisations translating the collective theories of change and strategies into their respective context.
With climate-related initiatives and networks within finance being legion, it is not easy to develop a clear understanding of what the concrete goals are that finance is pursuing – or rather those actors within finance that are willing to actively engage with the issue of climate change. Formulations referencing ‘net zero’, ‘Paris-alignment’ or ‘financing the transition’ define wide target corridors open to ambiguity and often prompt debates about the meaning of these terms. Equally ambiguous are the theories of change according to which concrete strategies employed are assumed to reach stated goals and their respective plausibility and efficacy.
By theory of change we mean a coherent causal chain that logically connects actions and strategies pursued with concrete outcomes and eventually stated (climate) goals. This causal chain needs to be plausible within a specific context and thus spell out assumptions about the boundary conditions of the environment it is supposed to develop effects in. For instance, a theory of change based on the assumption of perfect data availability within the next five years needs to be explicit about this very assumption. As with theories in science, the more concrete a theory, the better it is as it makes easier falsification, i.e., an assessment of its robustness and thus of the efficacy of finance’s efforts to pursue climate goals.
Currently, the four most commonly employed climate strategies in finance – taking a risk approach, investing in climate solutions, divesting, and engaging with companies – seem to be underpinned by four different theories of change. Yet, these underlying theories are often either not made explicit, blended inconsistently or simply rejected or accepted without interrogating underpinning assumptions. In the following, we review and reflect on these different theories of change, their strengths and weaknesses, and how finance knows or does not know whether they work.
The perhaps most widespread theory of change purports that pricing in so-called transition risk will lead to a gradual shift of capital allocation away from high-emitting assets to those companies and assets that are expected to thrive in a low-carbon economy. Given how familiar and fundamental the concept of risk is to the financial system, this theory of change is intriguing as it can potentially utilise existing organisational structures, risk assessment tools and methods, and perhaps most importantly existing regulatory mandates to further the goal of combating climate change. The TCFD and the work of the NGFS are the most prominent examples of the first step in this theory of change seemingly coming to fruition.
For the risk approach to be plausible and to work, three conditions need to be in place. First, for market prices to adjust to risk signals, these signals need to be perceived as credible. The most prominent driver of transition risk – climate policies – does not always appear credible in most high-emitting developed countries. The current geopolitical situation is being used to justify fossil fuel extraction closer to home, key emission reduction measures are watered down or abandoned due to public resistance against their unjust designs, and self-set climate goals are being missed by the year. Equally, while trends differ across geographies, the risk of consumers rejecting carbon-intensive lifestyles such as the consumption of animal products, fast fashion etc. on a global level seems minor at best given production figures of meatLink opens in a new window or clothesLink opens in a new window. This poses the question of whether transition risk signals are credible enough to significantly affect prices and thus capital allocation.
Second, as Mark CarneyLink opens in a new window remarked in his landmark speech on climate risk in 2015Link opens in a new window, climate change constitutes a tragedy of the horizon with decisions shaping potential climate change mitigation being made in the present and near future while the effects of those decisions will only be felt in the medium- to long-term future. Stock traders are assessed on their P&Ls on, e.g., a monthly basis, asset managers need to justify their performances on annual and quarterly bases, and insurers renew contracts annually. For instance, the fact that oil & gas majors have been amongst the best performing stocks lately may suggest that transition risk is not materialising on these time horizons yet. Do transition risks lie too far out in the future to significantly affect current asset pricing?
Lastly, in order to affect the cost of capital and eventually have an impact on carbon emissions in the real economy, transition risks would need to affect asset prices profoundly, not just marginally. With climate risk being integrated in traditional comprehensive risk assessments, will it outweigh or be muted by other types of risks? Will the effect on capital costs be significant enough to seriously affect the ability of large carbon-intensive companies to continue their operations – companies which often have balance sheets large enough to not having to rely on capital markets?
Currently, research on the degree to which climate-related risk differentials are being reflected in market prices largely comes from academia or public bodies such as the BISLink opens in a new window or the IMFLink opens in a new window and presents a mixed picture of climate risk being only moderately or not at all reflected in market prices. This poses two questions: first, should the financial sector itself, including service providers such as credit rating agencies, start providing better information on the degree to which climate-risk is being priced in? Second, how can we know whether the pre-conditions for the risk approach to work – especially a belief in the credibility of transition risks and a long-term outlook – are currently given in financial markets?
Often seen as the flipside of downside risk, so-called climate solutions are increasingly being perceived as investment opportunities, i.e., upside risk. Investing in climate solutions such as renewable energy providers, lab-grown meat companies, or home insulation providers directly helps to build a low-carbon economy, thus eventually reaching envisaged climate goals. For this theory of change to be plausible and to work, two related questions need to be answered convincingly: (a) how can we know the significance of a climate solution and, (b) how do we know an investor’s contribution to said solution? For instance, is the manufacturing of electric cars a significant climate solution to replacing internal combustion engines on roads; is it only replacing low-emission vehicles; is it in fact adding to the number of cars on the road without a replacement effect; or is it even stalling a more fundamental shift from individual to shared and public transportation? As to the role of the investor in all of this, is an investor buying shares in this electric car manufacturer contributing at all to the climate solution or only those investors lending directly to the company thus facilitating production? In other words, under what conditions can an asset class-specific investment strategy even credibly claim a contribution? Hence, there needs to be clarity around the mechanisms through which a specific investment in certain asset classes supposedly contributes to the delivery of a given climate solution. Building consensus across financial markets on these kinds of questions seems a necessary pre-condition for this theory of change both to be followed at scale and to be assessed as to its efficacy.
Especially civil society groups and social movements have advocated for a strategy that does not want to rely on indirect risk pricing or displacement effects: divestment. Divestment has been practiced for centuries in the context of faith-based investing and for decades in its somewhat more secular version of avoiding ‘sin stocks’ such as tobacco, alcohol, gambling, or specific weapons systems. In the context of climate change, however, divestment is widely rejected as a strategy by large financial institutions. The most prominent argument against divestment is that every share being sold by a climate-conscious investor will simply be bought up by an investor without any climate ambitions, effectively insulating the company in question from shareholder pressure. Hence, shareholder engagement to push companies towards decarbonisation is typically presented as preferable.
Such outright rejection of divestment, however, typically fails to engage with the wider theory of change behind divestment and ignores the possibility of collective action by investors. If all members of the NZAOA, for instance, divested from fossil fuels, affected companies would certainly experience significant pressure. However, given the recent anti-trust concerns surrounding the net zero alliances and any kind of collective effort around climate change, it is not clear how conducive the current conditions are for this theory of change to come to fruition.
A second theory of change behind divestment does not rely so much on a level of collective action that would affect share prices and cost of capital for carbon-intensive companies directly. For instance, in the context of the divestment campaign against the South African Apartheid regime, it has been argued that the effective mechanism was not the direct effect on, e.g., sovereign bond prices and interest rates, but the cultivation of a hostile environment for the regime, and an atmosphere in which it became less and less socially accepted to collaborate and engage with it – whether as a company, a government, or an investor. Here, divestment functions as a symbolic act changing norms and discourse, as outlined in a previous blog post. Divestment in the context of climate change could thus become a social tipping pointLink opens in a new window by playing a role together with other societal actors to nurture anti-fossil fuel normsLink opens in a new window. This approach offers the added advantage of extending the effects beyond companies issuing publicly listed bonds and equity to private and state-owned companies. There is substantial evidence from academic research that divestment campaigns do influence the discourse and norms in particular settings, thereby curbing capital flows to those companies being targeted. For example, Cojoianu et al 2021, using data on 33 countries, find that divestment campaigns reduced capital inflows into fossil fuel companies.
Engagement currently is the strategy of choice for most institutional investors and banks to pursue climate goals. The theory of change underpinning this strategy is simple: Ownership of shares or debt obligations come with a certain amount of alleged control or at least with a platform which can be used to convince or help management to decarbonise. Financial institutions are convinced enough of this theory of change to build coalitions around particular engagement campaigns to amplify their voice, and to organise engagement more efficiently, such as CA100+. Collective action therefore seems to be within reach under certain conditions.
While engagement comes with the benefit of not having to restrict one’s investment universe and thus potentially increasing risk in one’s portfolio or missing out on future returns, engagement has a mixed track record. The lack of success of climate-related engagement where it matters most – with oil & gas majors – has prompted a past advocate of engagement – the Church of England Pension Board – to announce divestment from companies such as Shell which remain irresponsive to investors’ engagement demands. This episode illustrates how engagement as the only strategy within a theory of change might render the causal chain leading to climate goals implausible, thus raising questions as to the strategies’ efficacy. The complementary role that divestment could play as an additional strategy within a theory of change illustrates how finance should explicitly combine and connect different strategies coherently within a theory of change, and treat those strategies as different tools in the same toolbox appropriate under different conditions.
Recently, several asset owners and asset managers have voiced a more general concern casting doubt on the robustness of all other theories of change discussed so far: The overall policy and market environment is simply not conducive enough for truly climate-aligned investment. With investors still being legally obliged to generate maximum profits on behalf of their clients and fiduciaries, the fact that not all investment needed to mitigate climate change are good financial investments, and not all high-carbon assets are financially bad investments leaves financial institutions in a dilemma: how can both profit imperatives and climate goals be met? To solve this dilemma, engagement is increasingly being expanded into so-called policy engagement, i.e., lobbying. The theory of change here is for regulators and supervisors to deliver a market design via laws and policies that aligns profitability with climate goals or at least removes barriers to climate-friendly investment. So far, however, there has been a lack of transparency on content, frequency, and effect of climate-related policy engagement by the financial sector posing the question what kind of information would be needed to facilitate an assessment of this theory’s efficacy.
Beyond the difficulty of such assessment, there is a deeper challenge to this theory of change which comes with the openly political stance financial institutions take in advocating for a specific climate-friendly market design. The anti-ESG movement in the US alongside widespread popular backlashes against environmental policies as hurting the working- and middle-class population – including the often-cited gilets jaunes – should be a cautionary tale to a financial sector often seen as synonymous with a wealthy elite which has already received preferential treatment during the Global Financial Crisis of 2008 at the cost of workers, mortgage holders, and taxpayers. Hence, for a climate-related policy engagement strategy that openly puts financial institutions into the arena of politics to be sustainable and successful, justice and equity considerations – i.e., a Just Transition – would need to be at its centre. The necessity of public support for a low-carbon transition poses the even more fundamental question for financial institutions of whether, and if so how, their policy engagement can facilitate a democratic process and consensus building. This might require the financial sector to amplify and voice the interests and demands of civil society organisations, social movements, and scientific bodies in its conversation with regulators and public sector representatives. In other words: climate change and the transition is inevitably and fundamentally a political issue, and, albeit uncomfortable, stands need to be made.
With open questions surrounding all of the theories of change outlined above, it is not so much a matter of whether any specific theory is right or wrong, but of how financial institutions can know when a specific theory is working or not. We suggest three steps to develop a better understanding of this very question.
- Finance needs to explicitly and transparently construct theories of change, i.e., causal chains connecting strategies with contextual conditions and desired outcomes. Such theories of change can entail multiple strategies as long as they are logically linked and do not undermine each other.
- It needs to be evaluated whether the contextual conditions assumed and causal links proposed seem plausible in a given time and place or whether a theory needs to be adapted.
- Finance should develop assessment systems to gauge the degree to which specific theories of change hold and which strategies develop which desired or undesired effects.
For many years the financial sector has been calling for more and better corporate disclosure as basis for climate-related assessments and subsequent investment decisions. With greater clarity around which theories of change are being employed in which context, more attention could be paid to information needs related to the assessment of a given theory’s and strategy’s efficacy. This may expose new data gaps, such as, the lack of information on displacement or rebound effects associated with climate solutions. It could also lead to the realisation that key information is indeed already available rendering the call for ever more granular and comprehensive disclosure somewhat unnecessary, freeing up resources and attention within both corporates and finance.
More fundamentally, a more explicit discussion of theories of change underpinning different climate strategies could have generative effects potentially broadening the current menu of available theories. For instance, perhaps policy changes are not the only way out of the dilemma of conflicting climate and profit goals. Fiduciary duties are not limited to the principle of prudence but also include the principle of loyalty and thus the possibility for a dialogue with fiduciaries around their actual and not just assumed preferences regarding investment outcomes and strategies.
Independent of the answers found and theories developed, the three steps proposed in this blog need to be taken with the urgency required by a rapidly diminishing remaining carbon budget and continuously increasing climate extremes.
 Transition risks are financial risks arising from the transition to a low-carbon economy such as climate-related legislation, shifts in consumer preferences towards more low-carbon products, low-carbon technology innovation disrupting markets etc.
 Ding, N., Parwada, J. T., Shen, J. and Zhou, S. (2020). ‘When does a stock boycott work? Evidence from a clinical study of the Sudan divestment campaign’.Link opens in a new window Journal of Business Ethics, 163, 507–27.
Cojoianu, T. F., Ascui, F., Clark, G. L., Hoepner, A. G. F. and Wójcik, D. (2021). ‘Does the fossil fuel divestment movement impact new oil and gas fundraising?’Link opens in a new window. Journal of Economic Geography, 21, 141–64.
Miglietta, F., Di Martino, G. and Fanelli, V. (2022). ‘The environmental policy of the Norwegian Government Pension Fund-Global and investors' reaction over time’Link opens in a new window. Business Strategy and the Environment.
The Net-Zero Alliances: insights from a political theory perspective
In recent years, several net-zero alliances have sprung up in the financial industry. In this blog post, we view these net-zero alliances from a political theory perspective and ask how one might understand the kind of responsibility that financial institutions are taking when joining and participating in such alliances. Drawing on the political theorist Iris Marion Young, we suggest that financial institutions’ responsibility in climate change can be understood in terms of a “political responsibility” that aims to address structural injustices. This perspective entails two key insights for finance professionals and their stakeholders. First, the net-zero alliances can be understood as vehicles to achieve structural change in finance’s own practices and the practices of the economic entities that they finance. Second, to enable structural change, public deliberation that ensures the voices of external stakeholders are heard and taken seriously remains critical.
There is an intuition that financial institutions who join net-zero alliances, such as, the NZAOA, NZBA, NZAM or the PAAO, are doing the right thing[a]. It seems right that they take the initiative and join forces with other financial institutions to collectively move their industry toward a net-zero transition. In light of the climate crisis, they are doing something that we might want and expect them to do.
As a brief reminder, the net-zero alliances have two broad objectives. First, the alliances commit financial institutions to setting climate targets in line with 1.5 degrees pathways and reaching net-zero emissions by 2050. Second, they develop industry-wide standards regarding how to set credible ‘science-based’ climate targets. Thereby, they define a minimum level of ambition within the financial industry about what it means to operate in alignment with the 1.5°C Paris Alignment goal. (You can learn more about the various net-zero alliances and initiatives in this blog post.)
Among the various net-zero alliances, the NZAOA, the NZBA, and the NZIA stand out. These three alliances have a particular governance structure. On the one hand, they are industry-led. But on the other hand, they are convened by UNEP FI. The NZAOA, in addition, is advised or supported by civil-society organizations and scientific research institutes, such as, WWF, Global OptimismLink opens in a new window, and PIK. This means that within these three alliances, but especially within the NZAOA, not only private financial interests but public-good oriented voices are present as well.
So, it seems that the net-zero alliances are doing something right, both in terms of their ambition as well as how they are governed. Is there a way to theoretically underpin this intuition? How can we understand the kind of responsibility that financial institutions are taking when joining and participating in a net-zero alliance? And what is it that net-zero alliances aim to achieve?
Moving from intuition to theory, we draw on the influential feminist political theorist, Iris Marion Young, and suggest that the activities of financial institutions in the net-zero alliances can be understood in terms of her conception of “political responsibility” in relation to structural injustices. A structural injustice, according to Young, is an injustice that arises not because of the blameworthy actions of a few identifiable actors. Instead, it arises from everyday practices that a vast number of individuals as well as institutions routinely participate in and that are considered normal. Such an injustice is structural because it concerns the social rules, norms, practices, and processes that structure our everyday actions and interactions.
What motivates Young at her time of writing in the early 2000s is the injustice of sweatshop labour in countries such as Indonesia, Bangladesh, and the Philippines. Certainly, we can single out and blame some actors, such as factory owners, for the exploitative and often inhumane working conditions of garment workers. However, this would absolve many other actors from taking up responsibility who are connected to sweatshop labour, too, though perhaps more indirectly. For example, there are the multinational brands that outsource production, high-street outlets who sell cheap fashion items, and millions of consumers who buy them.
Young claims that it makes little sense to blame all these actors for their contributions to sweatshop labour. We cannot hold them morally responsible in the sense that they would have culpably caused something bad to happen and now they need to ‘clean up their own mess’. After all, often their contributions are miniscule, often they contribute without knowledge or intent, and often they lack alternative options. Nevertheless, these actors can be held politically responsible. For Young, political responsibility is a shared, forward-looking responsibility to transform unjust social structures. Her idea is that actors who participate in unjust social practices that are ‘too big’ for them to change on their own should collectivise and organise to achieve structural change.
Now, what can we learn from Young’s political theory in the context of climate change? From her perspective, climate change can be considered a structural injustice to which financial institutions and other economic entities are connected through their business practices. To start with, climate change is caused by the actions of a vast number of individuals and institutions. Often, actors’ contributions in terms of their greenhouse-gas emissions are miniscule, they do not intend climate change to occur, they act in ways that are considered normal, and they lack alternative options.
Further, climate change impacts interact with existing social structures. The ways in which people around the world experience climate change harms depend not only on their geographic location but also on the social-structural position they occupy within global society. For example, it is well known that the global poor and especially women in the Global South are more vulnerable to climate change harms.
Finally, climate solutions require structural changes. It is not enough for a few actors to change their individual practices. Rather, we need to enable all social actors to change their practices collectively.
Climate change is a structural injustice to which financial institutions contribute through their investment, lending, and insuring of economic activities that are associated with greenhouse-gas emissions. This includes the financing of fossil-fuel assets and other emissions-intensive activities as well as more broadly the financing and facilitation of any activity that relies on the use of energy, land, materials, or transportation. It thus follows that financial institutions bear political responsibility in climate change, i.e., they have a shared, forward-looking responsibility to collectivise and organise to achieve structural change in social practices.
What do we learn from Young’s perspective? We believe there are two key insights for finance professionals and their stakeholders.
First, the net-zero alliances can be understood as vehicles to achieve structural change in finance’s own practices and the practices of the economic entities that they finance. Of course, the alliances are voluntary initiatives that bring together ‘climate leaders’ and enable them to set net-zero targets. Yet, the alliances’ broader impact could be to change financial practices and thereby move the whole industry to align itself with 1.5 degrees pathways. This would mean that instead of measuring how much capital worldwide is committed to net-zero, the net-zero alliances need to look at how the investment, lending, and insuring practices are changing through their work. One important way to do this would be more conscious work regarding the alliance’s respective theory of change about how net-zero targets will change finance’s own practices, and in turn how these changes accomplish change in the real-economy, rather than just lowering the risk for financial investors or meeting client demand. What are the structural changes in finance’s practices that the alliances can achieve and that will have the greatest impact on the real economy? Both the NZAOA and SBTi-FI explicitly discuss their theory of change in the respective target-setting protocols, but the other net-zero alliances under GFANZ are less explicit about it. Another important avenue is identifying and advocating for policy changes that create the enabling environment for the structural changes the alliances aim to accomplish.
Second, Young’s conception of political responsibility requires public deliberation about who should do what and how. This is because achieving structural change in social practices is never easy. Public deliberation would ensure that the voices of external stakeholders such as UNEP FI, civil society organisations, and scientific research institutions are heard and taken seriously. It would also ensure that those finance professionals working to achieve structural change take sufficient distance from their own practices to see how structural change can be accomplished. The net-zero alliances need to critically reflect on in what ways and to what extent they already allow for public deliberation and what would be measures to improve this. Ideally, the net-zero alliances would engage in a much broader debate about financial institutions’ role in addressing climate change.
 Young, I. M. (2011). Responsibility for Justice. Oxford University Press, Oxford & New York.
 Young, I. M. (2004). Responsibility and Global Labor Justice. The Journal of Political Philosophy: Volume 12(4), pp. 365-388.
 Young, I. M. (2011) Responsibility for Justice. Oxford University Press, Oxford & New York.
 Sardo, M. C. (2023). Responsibility for Climate Justice: Political not Moral. European Journal of Political Theory, 22(1), pp. 26-50.
 Gardiner, S. M. (2010). A Perfect Moral Storm: Climate Change, Intergenerational Ethics, and the Problem of Corruption. In S. M. Gardiner, S. Caney, D. Jamieson, and H. Shue (Eds.), Climate Ethics: Essential Readings. Oxford University Press, Oxford.
 Cripps, E. (2022). What Climate Justice Means and Why We Should Care. Bloomsbury, London.
 Gonzalez-Arcos, C., Joubert, A. M., Scaraboto, D., Guesalaga, R., and Sandberg, J. (2021). “How Do I Carry All This Now?” Understanding Consumer Resistance to Sustainability Interventions. Journal of Marketing, 85(3), pp. 44-61.
[a] The net-zero alliances include the Net Zero Asset Owners Alliance (NZAOA) for asset owners, the Net Zero Banking Alliance (NZBA) for banks, the Net Zero Insurance (NZIA) for insurers, the Paris Aligned Asset Owners initiative (PAAO) for asset owners, the Net Zero Asset Managers initiative (NZAMi) for asset managers, the Net Zero Financial Service Providers Alliance (NZFSPA), the Net Zero Investment Consultants Initiative (NZICI) and the Venture Climate Alliance (VCA). They are all part of the Glasgow Financial Alliance for Net Zero (GFANZ). You can learn more about the various net-zero alliances and initiatives in this blog post.
Header image: Lady Justice by Dennis S. Hurd is licensed under CC BY 2.0.
Engagement: what can corporations and financial institutions learn from civil society organisations?
What can financial institutions (FIs) learn from civil society organisations when it comes to engagement? For Dr Felicia Liu, Lecturer in Sustainability at the University of YorkLink opens in a new window, the emergence of sustainable finance represents a reimagination of the objectives, the practices, and, ultimately, the impact of finance. To reimagine financial institutions as agents of change, Dr Liu looks into a space often neglected, i.e., the ways CSOs engage corporations and financial institutions. The Warwick Climate Finance Research team sat down with Dr Liu, and here she shares her insights from past and ongoing research, and her reflections on why reliance on current engagement models may be problematic.
My PhD research focused on different types of bonds – green bonds, blue bonds, sustainability-linked bonds – and I wanted to extend my research more into the equity space. I know there’s a lot of good quantitative work looking at ESG indices and funds, but what is less discussed is how investors leveraged their relationships as shareholders and bondholders to drive change. I spent a lot of time in my PhD trying to understand how relationship shapes the construction of sustainable finance, so looking at engagement seems like a good continuation.
The other motivation for me was to extend my previous research geographically. The context for my PhD research was Hong Kong, Kuala Lumpur, and Singapore, and the relationship between investors and companies takes a very different form from the one we see in Europe. Most businesses in Asia are still primarily owned by families or management, with shareholders only holding a 1-2% stake in the company. So, unless you are a sovereign wealth fund that owns a larger share of the company, there is very limited potential for impact on the majority owners of the company. Hence, looking at investor engagement is a sensible extension, both geographically and conceptually, as a next step. It makes sense for an economic geographer since we are interested in the flows of capital but also in the personnel and the relationships of how knowledge and information is exchanged.
Civil society organisations (CSOs) and financial institutions (FIs) are often thought of as very different beasts. How did you develop the idea of looking into what the latter can learn from the former?
This idea is part of a larger consortium of ongoing projects derived from my postdoc at the Oxford Sustainable Finance GroupLink opens in a new window that sought to identify different mechanisms to drive real economy change through the financial systemLink opens in a new window. For me, the emergence of sustainable finance represents a reimagination of the objectives, the practices, and, ultimately, the impact of finance. As a result, we also need to reimagine financial institutions, such as banks, asset managers, and asset owners as agents of change. If we want finance to deliver more than just immediate short-term financial returns but longer-term environmental and social goods, how do these institutions need to think and behave differently? One type of entity that immediately comes to mind to look at for this is civil society. It entails all the actors from activist movements, to philanthropic elites, to the media, and everyone in between who can hold the financial institutions to account. And what civil society organisations are really good at is seeing the longer-term big picture and thinking about the broader theory of change if you will. What we learnt was that they have an end goal in mind and they work it backwards. Of course we know it’s not that linear and that there is a lot of going back and forth: what is achievable, what means do we have, what external context will affect our delivery, and so on. So it’s not a linear process but with civil society organisations as with finance there is a lot of negotiations, knowledge exchange, and a lot of concessions to be made.
What did you find? How do ideas of engagement differ between the two? What can financial institutions learn from CSOs?
The research project has not yet concluded so insights are somewhat limited as of now. Based on a scoping literature review on how civil society has engaged in the sustainable finance discourse since the Paris Agreement, I found five key ways in which civil society can still drive change within finance:
Fostering alliances and partnerships. CSOs form alliances and partnerships with other stakeholders, such as corporations, institutional investors and government bodies in order to maximise their impact because their financial and human resources are typically limited. At the same time, corporates could enhance the legitimacy of their sustainability programme by collaborating with an CSO. Governments may enhance the reach and impact of their policies with the support of CSOs. In addition, these collaborations foster knowledge exchange between stakeholders.
Activism. CSOs stage activism campaigns, ranging from public protests to shareholder activism, to exert pressure on corporations and financial institutions to change their behaviour. While activism campaigns could lead to uneasy relations between CSOs, corporates, financial institutions, and policymakers, the attention activism campaigns draw are often effective in pressurising firms to adopt more sustainable practices. Sometimes, the threat of staging a campaign itself could suffice.
Standardisation and setting best practice. CSOs create standards and guidelines for corporates or investors to follow with the objective of creating more sustainable behavioural norms. These standards and guides could operate on different scales and geographies, ranging from targeting a specific industry to global pledges for corporate sustainability.
Research and knowledge dissemination. CSOs produce and publish research, in the form of industry or company rankings, special issue reports and/or case study exposés. Research provides the knowledge scaffolding that informs CSO strategies. The publication of research also enhances the awareness of corporates and financial institutions on the matter, and to draw media or civil society attention to pressure corporations to take action.
Lobbying. CSOs engage in lobbying at different levels and departments of government and regulatory bodies to influence sustainability-related policy-making and financial regulations. CSOs could participate in lobbying as an ‘insider’ by participating in policy-making processes. In other cases, CSOs have sought to influence policy as an ‘outsider’ through letters, petitions and responses to public consultations.
This scoping review was mainly conducted to enhance my own understanding of the intersection points between civil society and finance. I’m currently developing a new project that deep dives into the role of philanthropic foundations in driving climate investment. Perhaps I’ll give the blog another update when it comes out!
The most surprising thing to me is the amount of optimism and enthusiasm around investor engagement. This enthusiasm is built on a range of assumptions and does not take into account how only very incremental change is being achieved. Shareholders can push companies only so far before they lose support from other shareholders in their coalition, and given how little time there is left to address some of the most urgent environmental crises there is an element of kicking the can down the road.
Another interesting finding was the degree to which many engagement campaigns are highly dependent on chronically under-funded NGOs to propel the momentum forward. NGOs, for instance, often provide the knowledge and organisational backbone to shareholder campaigns leading up to AGMs, forging alliances, organising calls etc. It does make you wonder if the very well-resourced financial sector is free riding on the third sector in many instances.Sustainable Finance and Transmission Mechanisms to the Real EconomyLink opens in a new window
Issue #6 highlights
Civil society organisations (CSOs) and financial institutions (FIs) are often thought of as very different beasts. How did you develop the idea of looking into what the latter can learn from the former?
(Climate) Impact strategies for investors: what does academic research say about effective levers to achieve real economy impact?
As investors move towards implementing and making progress on their interim and long-term net zero commitments, the question arises what the most effective levers are to achieve real world impact. We discussed this question with our colleague Dr Emilio Marti, Assistant Professor at the Rotterdam School of Management. Emilio argues that perspectives from disciplines other than financial economics are important in finding answers to the multi-dimensional question of shareholder impact. Whilst mainstream investors and financial economists focus on portfolio screening and engagement as impact strategies, Emilio and his colleagues identify a third, hitherto underappreciated strategy of ‘field building’. Even more importantly, he suggests that shareholder impact is a distributed process that arises through the interactions of different impact strategies. Thus, to come to a better understanding of how investors can achieve their net zero commitments, there needs to be a greater recognition and appreciation of how different impact strategies interact and build on each other.
“What is really missing in the market [and] in the academic field, is an independent discussion about ‘what actually has real-world impact? Where can we see this?’ Because we all say, we want to have real-world impact, and would want to do more of what is most effective.” Two weeks ago, a manager at a large asset owner we interviewed expressed his dismay about the current inability to identify the most effective levers to address climate change. “And on this, yeah, there are a few older papers, but there isn’t much research.” We used this prompt to speak with our colleague Emilio Marti from the Rotterdam School of Management about his research on the different impact strategies of shareholders.
What we are seeing today is a shift in who is most active in sustainable investing and who is defining it. On the one hand, it is increasingly mainstream investors, such as large asset managers and asset owners, who are becoming active in this field – you would not have seen this two decades ago, when more peripheral shareholders were most active in sustainable investing. At the same time, there has been a massive growth in financial economists becoming active in research on sustainable investing – something you would not have seen a decade ago. This dual movement of mainstream investors and financial economists getting active in sustainable investing matters because they define or redefine what environmental impact via investing is, and how it can be done. And here, we can see a rather specific perspective, across both the financial investing field and the academic financial economics literature, on two types of impact strategies: portfolio screening and shareholder engagement. They are practically quite doable and empirically good to observe for researchers. An excellent and widely read literature review on this topic is for example the paper by Koelbel et al.. And although this and other excellent work is out there, I always thought that there was something missing.
We conducted a systematic and multidisciplinary literature review in which we went beyond just financial economics research. We started very broadly by screening research on sustainable investing across four disciplines: management studies, finance, sociology, and ethics/sustainability. We screened almost 4,000 papers and found 69 studies that specifically analysed shareholder impact in sustainable investing. Out of these studies, 53 cover the impact strategies of portfolio screening and shareholder engagement. But then we had 16 studies that were talking about something different, something we came to understand in our review as an impact strategy of field building.
Field building can be effective because companies are embedded in a field in which many stakeholders are active and in which certain assumptions, norms, and rules shape corporate behaviour. Now, some shareholders, especially less powerful ones, realise that they can influence companies indirectly either by changing the behaviour of shareholder with more direct influence on companies or by changing the assumptions, norms, and rules that shape corporate behaviour. This is what we define as the impact strategy of field building. And we can identify a relatively clear pattern here: these field-building actors are mostly relatively peripheral shareholders, such as religious and other values-oriented shareholders, who have been in the sustainable investing field much longer than mainstream investors. At the same time, those studies that point to these dynamics are largely sociologically oriented ones.
What we showcase with this review study and the identification of the field building strategy, is that while both mainstream investors and mainstream economics are becoming increasingly important in the debate and definition of impact and sustainable investing, we can find other ways of creating impact, and developing and understanding ways of sustainable investing by looking into other disciplines and investors.
Now, these three strategies, of course, do not contradict each other but rather build on one another. And although this is something future research needs to study in more detail, our analysis suggests that shareholder impact needs to be looked at as a distributed process. That means that there are different actors and activities involved in order to realise impact [for a summary of the three impact strategies, see Figure 1].
Figure 1: The three impact strategies of portfolio screening, shareholder engagement and field building.
Divestment campaigns are an example here. Even though many mainstream investors and financial economists see divestment campaigns as ineffective, they misunderstand that such campaigns do not aim to directly change the cost of capital. Instead, they are a symbolic activity that is supposed to change the discourse and stigmatise certain industries: it's supposed to change the categories in which we think about certain business activities, which means that we are talking about field building. And there is ample evidence in research that divestment campaigns have impact, for instance that divestment campaigns made it harder for oil and gas companies to raise capital. 
We find that research is thin in this regard, and scholars often make assumption on processes and dynamics in companies around shareholder impact, which lead to a rather simplified understanding of what a company does. For instance, a lot of research assumes that changes in cost of capital influences unsustainable companies. But this presumes that managers actually perceive subtle changes in the share prices, and can relate this to sustainable investing. This is a strong assumption given that share prices change all the time for hundreds of reasons. So, under which conditions would a manager relate a change in share price to their own sustainability practices rather than anything else they could relate it to? There is a huge research gap and, therefore, great opportunity for future research. There is a whole research community around CSR that can help us start drawing these specific lines between shareholders and companies.
What implications does your research have for investors current efforts to create impact on companies?
For the reasons we already discussed, field building as an impact strategy is rather underappreciated in the current debates, which focuses mostly on portfolio screening, or shareholder engagement. And we strongly suggest that field building should get acknowledged as a third key impact strategy. We would argue that what is being achieved by the CDP and other initiatives but also by divestment campaigns, although not acknowledged as such, qualifies very much as effective strategies of field building. But for investors directly, of course, it’s really hard to monetise field building. Internalising financial benefits of field building is virtually impossible, because they will be captured by other shareholders, by future shareholders, and by society in general. But the good thing is that asset owners are willing to pay for impact. The assumption that increasing profitability is the primary motif for sustainable investing is contradicted by so much empirical academic and practitioner evidence:  people are willing to pay 20, 30, 40, 50 basis points to create impact.
And since we define shareholder impact as a distributed process, field building needs to be understood in-step with the other strategies. For instance, regarding divestment campaigns, I'm not saying that every shareholder should divest. But mainstream shareholders should acknowledge that divestment is an important part of what creates impact. The effect of divestment on the discourse is probably what makes it easier for those shareholders in engagement meetings with companies.
The question is even after our review, which of these impact strategies is most effective? Julian Koelbel and colleagues suggest that shareholder engagement is the most effective impact strategy. But how do we know the relative importance of shareholder engagement versus portfolio screening versus field building? I wouldn't even know how to start to address that question. Since it is a distributed process, this question may not make sense in the first place, because you need all three components to create pressure on companies. Impact on companies becomes most likely when all three things happen in parallel: some shareholder engage directly with companies, other shareholders influence the cost of capital at a bit more distance, and in the background, field building reshapes the fields in which companies operate.
Emilio’s research on impact strategiesLink opens in a new window has been published in the ‘Journal of Management Studies’Link opens in a new window
 Kölbel, J. F., Heeb, F., Paetzold, F. and Busch, T. (2020). ‘Can sustainable investing save the world? Reviewing the mechanisms of investor impact’. Organization & Environment, 33, 554–74.
 Marti, E., Fuchs, M., DesJardine, M.R., Slager, R. and Gond, J.-P. (2023), The Impact of Sustainable Investing: A Multidisciplinary Review. Journal of Management Studies. https://doi.org/10.1111/joms.12957
 Theodor F Cojoianu, Francisco Ascui, Gordon L Clark, Andreas G F Hoepner, Dariusz Wójcik, Does the fossil fuel divestment movement impact new oil and gas fundraising?, Journal of Economic Geography, Volume 21, Issue 1, January 2021, Pages 141–164, https://doi.org/10.1093/jeg/lbaa027
 George Ferns, Aliette Lambert and Maik Günther, The Analogical Construction of Stigma as a Moral Dualism: The Case of the Fossil Fuel Divestment Movement, Academy of Management Journal, Volume 65, Number 4, August 2022, https://doi.org/10.5465/amj.2018.0615
 Rob Bauer, Tobias Ruof, Paul Smeets, Get Real! Individuals Prefer More Sustainable Investments, The Review of Financial Studies, Volume 34, Issue 8, August 2021, Pages 3976–4043, https://doi.org/10.1093/rfs/hhab037
Issue #5 highlights
Net Zero target-setting for financial institutions: academic insights on “standards markets”
Can academic insights on “standards markets” help us make sense of developments around net-zero target-setting frameworks for financial institutions (FIs)? With looming regulation and mounting pressure from civil society groups, several net-zero initiatives or alliances have sprung up in recent years that have developed and continue to refine standards for how to set targets and achieve net zero by the year 2050. However, navigating the multiplicity of net-zero alliances together with their target-setting standards is a challenge. In this blog post, we provide an overview of the different alliances and standards. Drawing on academic insights about “standards markets” in other industries, we highlight some of the dynamics that underlie the emerging net-zero target-setting field for FIs, and we provide an outlook where the field might be heading.
As of today, six net-zero alliances for financial institutions exist (see Figure 1), which we group into three different categories. First, there are three UNEP FI convened alliances—the Net Zero Asset Owners AllianceLink opens in a new window (NZAOA) for asset owners, the Net Zero Banking AllianceLink opens in a new window (NZBA) for banks, and the Net Zero Insurance AllianceLink opens in a new window (NZIA) for insurers. The alliances are led by the FI members and convened by UNEP FI (as well as PRI in the case of NZAOA). Each alliance has their own governance structures and processes, through which they set the direction of the alliances, develop their target-setting protocols, and release other publications through various working groups.
The second category consists of two initiatives convened by the Institutional Investors Group on Climate ChangeLink opens in a new window (IIGCC): the Paris Aligned Asset Owners initiativeLink opens in a new window (PAAO) for asset owners and the Net Zero Asset Managers initiativeLink opens in a new window (NZAM) for asset managers. These initiatives are industry-led, too, but more indirectly. Rather than the member FIs themselves, industry-related NGOs and industry membership bodies—the regional “network partners” including IIGCC, IGCC, AIGCC, CDP, and CeresLink opens in a new window—develop the initiatives’ net-zero standards.
Both UNEP FI and IIGCC-convened alliances form part of GFANZ, the Glasgow Financial Alliance for Net Zero, which former Bank of England governor Mark Carney initiated in the runup of COP26 in 2021. The net-zero alliances have also been accredited by the Race to ZeroLink opens in a new window campaign, which was launched by the UN High-Level Climate ChampionsLink opens in a new window, and brings together not only financial institutions but also ‘real-economy actors’, such as businesses, cities, and regions.
Figure 1: Overview of Net Zero Alliances for Financial Institutions
Finally, there is the Science Based Targets initiativeLink opens in a new window (SBTi), the longest-existing player in the field. Whereas the other alliances were launched between 2019 and 2021, SBTi has been around since 2015. The initiative is NGO-led, with WRI, CDP, UN Global CompactLink opens in a new window, WWF taking the lead. Similar to SBTi’s previous work on corporate net-zero standards, SBTi more broadly includes perspectives of a variety of stakeholders (e.g., FIs, consultants, academics, etc.) in the development of its own net-zero target-setting standard for FIs. Moreover, SBTi’s standard is not specific to FI types—say, asset owners or banks—but covers all FI types.
All six alliances have seen steady growth in memberships since their inception (see Figure 2). With the possible exception of SBTi, however, they are all still fairly new, and it remains to be seen how their acceptance within the financial industry will develop with time. There is overlap between the different alliances, some of which is due to the fact that the developed standards cover different parts of a FI’s business. For example, NZAOA standards would apply to the investment portfolio of an insurer, while the underwriting side of the business would be covered under membership in NZIA.
Figure 2: Growth of members of Net Zero Initiatives for Financial Institutions
The development of standards by private and non-governmental actors, such as businesses and NGOs, has attracted the attention of academics, especially since the recent rise of various sustainability standards, for example, for coffee or cotton, forestry or fisheries. Academics have found that, where multiple standards compete for adopters, a “standards market” emerges.
There are two countervailing mechanisms that underlie the dynamics of a “standards market”: convergence and differentiation. Convergence describes the increasing alignment of standards over time, whereas differentiation describes the distinctive market positioning of standards. Moreover, the ongoing dynamic between convergence and differentiation brings about a form of meta-standardisation, where standards themselves become partially ‘standardised’ at a higher order ‘rules of the game’ level.
The upshot of these dynamics is that, over time, standards will adapt and position themselves within their market niche. For example, a standard with relatively stringent requirements may be positioned as ‘premium’ and adopted among only a few industry leaders. Other standards, in contrast, may set a more basic industry benchmark that will be adopted more widely.
The underlying dynamics of “standards markets” shape the adoption (or not) of standards. And we can already observe some of these dynamics in the net-zero standard-setting field.
We can see convergence among net-zero standards when looking a bit more closely at the specificities of the respective standard requirements. For example, there appears to be a consensus regarding the target-setting timeline. From the moment of joining an alliance, FIs are given roughly one year to set targets, and these targets need to be updated every five years. There is a similar consensus regarding the target time horizon, too. All alliances require setting short-term targets, usually for the next five years or until 2025 and 2030, as well as having a long-term commitment to achieving net-zero emissions by 2050 - a remarkable consensus given the wide range of net zero goals outside of the financial sector between the years 2025 and 2070.
Perhaps more interestingly, most alliances require or at least encourage setting targets regarding three different target types. Like companies in other industries, FIs are asked to set emission-reduction targets and engagement targets. Unlike other industries, however, they are also encouraged to set targets for investments in climate solutions. All alliances appear to exclude carbon offsetting as a way of reducing portfolio emissions. But they do allow offsets for residual emissions.
The issue of Scope 3 emissions by investee companies is equally uncontroversial. Scope 3 is recognised as important throughout all alliances. But it is also recognised that poor data availability and quality often prevent setting adequate targets, so that Scope 3 emissions should focus on the most material sectors or be phased in as a factor over time.
Finally, there is a basic consensus regarding fossil fuels, at least when it comes to thermal coal. Coal should be phased out, but there is less consensus when it gets to oil and gas.
This leads to the issues where the initiatives differ in their approach and stance. In fact, so far only the NZAOA has a detailed policy for oil and gas, indicating its positioning as a ‘premium’ standard setter. The NZAOA is also the only alliance that updates its target-setting protocol on a frequent, annual basis, further adding to that ‘premium’ label.
However, the key lines of differentiation appear along the issues of monitoring and sanctioning. Although all alliances require their members to publicly disclose their net-zero targets, there is a qualitative difference in the review process of these targets. For example, NZIA members report their targets “in [the] form and detail they consider appropriate”. NZAOA members, in contrast, face a more detailed internal target review process, through which they can be flagged as not meeting the minimum requirements. Even more actively, SBTi ’validates’ targets and has no qualms about rejecting them. This more active stance in reviewing and validating targets is one of the main ways in which SBTi signals its position as a ‘premium’ standard.
With regard to sanctioning, there are qualitative lines of differentiation, too. Most alliances have some procedure in place to sanction those members who fail to set adequate targets or fail to report on their progress made toward achieving those targets. But this procedure can be more or less stringent. NZBA members, for example, are simply “encouraged to self-identify where they have not been able to meet the commitment”, whereas NZAOA members face a stricter traffic-light dunning process. If the light turns red, the delisting of a member is a possible outcome. Yet, even NZAOA members are given ample time and opportunity to avoid this outcome. SBTi delists FIs after two years if they fail to submit targets for validation, or it rejects FIs’ targets in the validation process if they do not meet the required standards.
Finally, there is clear differentiation with regard to climate scenarios. All alliances agree that net-zero targets need to be set in alignment with “science-based” scenarios. However, while most alliances allow FIs to choose among certain 1.5° C scenarios—usually, those of the IPCC or IEA—, SBTi prescribes which scenario to use — currently a scenario of the IEA.
Where, then, are we heading in the net-zero standard-setting field? One thing to look out for in the future is the evolving dynamics between the different net-zero alliances and their respective standards. Particularly interesting is the question whether, and in what ways, there will be a form of meta-standardisation, where different standards converge on some core criteria and overarching principles. In other “standards markets”, for example, in the coffee industry, academics have observed the emergence of shared certification platforms and industry-level codes of good business practice that most standards build upon. We can already see active exchange of ideas between the net-zero alliances under the umbrella of GFANZ and UNEP FI. But it will be exciting to see whether shared certification platforms and industry-level codes for net zero will emerge.
 For the purposes of our analysis, we excluded the Net Zero Financial Service Providers Alliance (NZFSPA), the Net Zero Investment Consultants Initiative (NZICI) and the Venture Climate Alliance (VCA), all part of GFANZ
 Reinecke, J., Manning, S., and von Hagen, O. (2012): The emergence of a standards market: Multiplicity of sustainability standards in the global coffee industry. Organization Studies 33(5-6), pp. 791–814
 Among the six net-zero alliances, NZAM does not develop its own standard requirements but refers to other standards.
 NZIA Target-Setting Protocol (Version 1.0, January 2023), p. 5: NZIA-Target-Setting-Protocol-Version-1.0.pdf (unepfi.org)
 NZBA Governance arrangements (November, 2021), p. 8: NZBA-Governance-Doc_updated-021122.pdf (unepfi.org)
 Reinecke, J., Manning, S., and von Hagen, O. (2012)
Header image: NZAOA, NZBA, NZIA, PAAO, NZAM, SBTi
Implied Temperature Rise: mapping the main controversies
Implied Temperature Rise (ITR) tools that attempt to measure the temperature alignment of companies, portfolios and financial institutions are gaining momentum in the private climate finance space. ITR has become popular as it is a seemingly intuitive metric that captures the climate debate in one number and that allows communicating with various stakeholders. Most data and analytics providers now offer an ITR or temperature alignment solution. Many financial institutions feel they have to report a temperature score, and TCFD and GFANZ actively promote ITR. Yet, despite its wide support and appeal, ITR remains a contested and controversial tool. Our research uncovers that the main controversies surrounding ITR tools are rooted in the fact that a variety of different components that are not ‘ITR-specific’ are brought together to calculate a temperature score – a process we refer to as ‘stitching together.’ In this blog post, we map these controversies around ITR.
Calculating an ITR score involves a series of calculations, as depicted in Figure 1. First, one needs to estimate the remaining global carbon budget for specific temperature outcomes, such as e.g., 1.7°C, and then derive an emissions benchmark against which to compare companies. Next, a company’s future emissions are projected, typically considering the climate targets a company has set. Third, the ITR tool assesses whether a company’s projected emissions over- or undershoot their respective benchmarks. Then, it translates emissions over- or undershoot into a temperature score, typically using a TCRE factor. These scores in turn are calibrated against the expectations, intuitions and opinions of market actors. Finally, to determine the temperature score of a financial portfolio or investment fund, ITR tools aggregate temperature scores across assets.
Figure 1: Series of calculations to compute an ITR score
Author: Warwick Climate Finance Team
In the beginning, the scores of different temperature tools diverged substantially, sparking debates about how methodologies could be made more coherent. In 2020, the Portfolio Alignment Team (PAT), formed and promoted by TCFD, developed ‘best practice’ guidelines to increase convergence and transparency around nine key judgements in ITR design. Later, this work continued under GFANZ’s workstream on portfolio alignment.
Despite the efforts by the PAT and GFANZ, ITR remains a controversial tool seen by some as the one-stop solution for climate alignment indicators, and by others as a meaningless figure built on speculation and assumptions. To better understand these controversies, one needs to understand the various components that are brought together in ITR calculations, such as, companies’ emissions and target data, climate scenarios, the TCRE multiplier and the PAT/ GFANZ guidelines. We conceptualize these components as ‘knowledge infrastructures’ because they “generate, share, and maintain specific knowledge about the human and natural world” (Edwards*, 2017, p. 36). These knowledge infrastructures are not ‘ITR-specific’ as they have been developed and are being deployed for a variety of other uses, such as, calculating carbon footprints, conducting scenarios analysis etc.
Figure 2: ITR as ‘stitching together’ various knowledge infrastructures
Our research uncovers that the various controversies around ITR are rooted in how these knowledge infrastructures are brought together – a process we refer to as stitching together. ‘Stitching together’ these diverse elements to assemble an ITR tool is not a mere technical task. Just like the literal practice of stitching, assembling an ITR tool is both art and craft with views and levels of tolerance differing as to what elements fit together or which stitching technique is most appropriate. Here, we provide a landscape view of the most central of these controversies.
Many opponents of ITR tools argue that regardless of the mathematical operations the tool performs, input data simply does not fit the requirements of ITR tools. Either the data quality is insufficient or necessary data is simply not available resulting in unreliable or inaccurate temperature scores. This argument is often made in the context of greenhouse gas (GHG) emissions data. While corporate reporting of such data has become more widespread over the past years, data coverage is still limited – especially outside of Europe. Moreover, where data is reported, reporting practices can differ across companies and even within companies across reporting periods. Data coverage and consistency are an even greater issue for Scope 3 emissions data. Where proponents of ITR attempt to mend these gaps in the data fabric of the tool by computing estimates for emissions data; their opponents criticise the unreliability of such estimation techniques and unwanted effects (see also our blog post on Scope 3 emissions estimations).
With company targets being a critical element in many ITR tools, the availability and quality of such target data is another focus of the debates around ITR. In fact, targets are reported even more rarely by corporates, and while for emissions reporting there is a well-established standard in place – the Greenhouse Gas Protocol – target setting and reporting as a nascent practice is significantly less standardised. Hence, reported company targets are often not comparable across companies and reporting periods. Furthermore, company targets are still rarely assured by third parties and are not always backed up by more granular transition plans or interim targets, creating doubts around their credibility.
The problems of stitching together data with other elements of ITR does not stop here. Accounting for Scope 3 emissions in an ITR tool is no trivial accounting task. ITR tool designers see themselves confronted with the task of avoiding double-counting of emissions to not make ITR scores meaningless in other ways. Also, they need to surgically match benchmark-specific approaches to Scope 3 accounting to Scope 3 input data as the underlying accounting conventions can diverge leading to a comparison of apples to pears rather than of apples to apples.
One intriguing feature of the ITR score is its universality: The physical impacts on the climate are dependent on emissions, not on company or asset types, making a temperature score a seemingly universally applicable metric across companies and asset classes. This theoretical universality of ITR is fiercely contested in practice, however. There is general agreement on the commensurability of ITR scores of companies in the same sector. Here the argument goes that all companies are assessed on the same measure of emission intensity and thus compared to the same benchmark. Once a different emissions intensity metric and thus a different benchmark needs to be stitched into this ITR scoring process, the consensus erodes. For instance, can a cement company be assessed based on an emissions intensity metric of CO2e per tonne of cement be compared with a chemical company assessed on a CO2e per revenue basis? Once completely different asset classes are being scored such as sovereign debt and listed equities, underlying scoring methodologies become even more heterogeneous thus triggering debates on the degree to which they can be considered commensurable and hence can be aggregated, e.g., on an investment portfolio level.
With the specificities of stitching together being this controversial, a more general debate and concern surrounds ITR: The question of what is in the box that is an ITR tool. Even though commercial ITR providers offer a higher degree of transparency to their clients, methodologies are often much less transparent to external stakeholders. Pointing to diverging scores of different providers, critics of ITR hence refuse to accept ITR scores as useful or meaningful if underlying methodologies are not fully disclosed. ITR providers now often outline how they conform or do not conform with the GFANZ and PAT guidance, and how they made their nine key design choices, thereby creating the perception of greater transparency. However, with a wide range of additional choices still to be made when designing an ITR tool – choices involving judgement calls which in turn significantly affect ITR scores – this controversy is yet to be fully resolved.
With both the construction of ITR and the controversies surrounding it still in full swing, we will not provide a definite conclusion on the nature, meaningfulness, or potential of ITR. Instead, we will continue to provide our academic perspective on different layers and aspects of ITR being made. In our next post, we will provide stories from the field on how these above mapped controversies are temporarily and locally resolved in practice. In a third blog post we will analyse how different logics and interests drive and shape ITR design. We will conclude this series of ITR blog posts with reflections on how the general focus on the specificities of stitching together ITR elements obfuscates more fundamental normative questions dormant in ITR design choices.
Header image: Warwick Climate Finance Team
Scope 3 emissions data: is reported data really better than estimated data?
Scope 3 emissions estimates are most probably here to stay, but they need to become more transparent. Despite the prevailing preference in financial markets for reported Scope 3 emissions data over provider-modelled estimates, we need to acknowledge that reported Scope 3 emissions are also largely estimated. In fact, the differences and inconsistencies of estimates are often exacerbated between those of providers, and those of reporting companies. For the time being, financial institutions will need to live with estimates. However, in order for them to make more confident decisions and assessments there is room for improvement in understanding estimates of both providers and reporting companies.
Carbon emissions data can be difficult to handle, especially companies’ indirect Scope 3 emissions, which often are insufficiently reported or estimated differently. For instance, we follow a large asset owner whose climate risk team are discussing whether to apply a credibility factor to the Scope 3 emissions used in calculating climate metrics. Because their data provider only provides estimated Scope 3 emissions data, and no reported data, the team is unsure how much they can trust the numbers. The industry-wide preference of company reported data over provider estimated data is clearly visible amongst the team members, yet Susan*, who works in the asset owner’s investment team, offers a different perspective: “I'm starting to think that actually estimated is better […] than what is reported.”
In our research, we find that the distinction between company reported, and provider estimated data is not always helpful, especially when judging one over the other in climate-related financial management. Instead, we need to acknowledge that estimates are by and large the primary Scope 3 representations produced by both reporting firms and data providers. Getting to grips with this means accepting the centrality of estimations while pushing for more transparency and awareness around Scope 3 modelling by both reporting firms and data providers.
A fundamental problem with accounting is that it is difficult to create an account as a representation of reality. This becomes particularly evident in the case of Scope 3 emissions accounting, which is trying to create a representation of the reality of indirect emissions of economic activities.
At the ‘Design for a Sustainable Future’ exhibition at the London Design Museum, we found a good illustration of the actions necessary for creating representations in the work of the Dutch art collective, Studio DRIFT. Studio DRIFT creates sculptural representations out of the materials of which everyday objects, such as cars and mobile phones, are made. Creating these representations involves meticulous disassembling of the objects; identifying, sorting, classifying, and counting individual components followed by making exact volume blocks of the materials, and arranging them as a sculpture. As you can imagine, the sculptures can look very different depending on how, and by whom, those steps are applied. Anyone who has ever been involved in creating or using carbon accounts knows that the context-dependent identifying and measuring of GHG emissions is similarly complex, and produces unique accounts. Yet, while, in art, producing unique representations is the desired outcome, in climate related finance, the uniqueness of representations is currently one of the biggest problems.
Image: Studio DRIFT
This representational problem is important for finance because Scope 3 emissions are fundamental for the decarbonization pathway of financial institutions. If taken into account fully, they are the largest emissions position in portfolio emissions measurement, in reporting and monitoring, as well as in target setting or investee company assessments (see financial services in Carbon Disclosure Project figure on Scopes 1, 2, and 3 distribution below). The demand for viable Scope 3 emissions data is, therefore, high, and the near universal answer is to request companies to report Scope 3 emissions. Yet, despite the increasing reporting of Scope 3 emissions data, the vast majority of Scope 3 emissions data in the portfolios of financial institutions is still based on model estimates provided by data and analytics providers such as MSCI, S&P Global Trucost, ISS ESG, or the CDP.
The fifteen different Scope 3 emissions categories are usually modelled separately, often using different inputs such as environmentally extended input-output tables or life-cycle analysis, and proxy data such as revenue. Given that parts of the inputs often depend on a provider’s ‘universe’ of companies’ Scope 1 and 2 emissions, the composition of such provider-specific databases matter for the Scope 3 models’ calibration, estimation and benchmarking. This also includes the crucial sub-sector differentiation, and mapping of firms’ ownership structures. In other words, there are numerous moving parts, and a lot of data to be collected and curated, whose overall management ultimately aims at consistency within, and across Scope 3 emissions accounts. And while consistency is what is desired by providers and users alike, creating and maintaining it is the primary reason for the differences between providers’ estimates.
Notwithstanding these challenges in modelling Scope 3 emissions, the question is whether firm-reported Scope 3 data really is that much better. A closer look at reported data reveals that Scope 3 reporting itself is mostly based on company-internal estimations as companies often do not have direct access to the emissions in their upstream and downstream activities. For most categories, reporting companies apply the ‘average-data methods’, as the GHG protocol calls them, which apply emissions factors to a proxy datapoint to arrive at an emissions number – in other words, an estimate.
The need for estimation produces a number of practical issues on the ground: (1) reporting skills differ year-on-year, because companies become better in their Scope 3 accounting over time, change accounting tools, and take more and more factors and data into account. (2) The base data used by reporting firms is usually not updated annually while emissions are calculated on an annual basis. (3) There are different legitimate methodologies applicable and applied within individual Scope 3 categories.
The volatility in reported data is, therefore, arguably primarily the result of inconsistencies, different and changing skills, and choices of reporting companies performing in-house estimations. When reported through CDP, the applied methodologies are disclosed, but only a part of companies report through the framework, and those who do, rarely report on all (relevant) categories. This means that reported estimates are often quite opaque.
Applying the justified stance in demanding high-quality reported Scope 1 and 2 data to Scope 3 data seems, therefore, misplaced. Even in a world of perfect Scope 1 and 2 reporting, Scope 3 estimation would still be needed, for instance, for end-user emissions or due the intricacies of the stacking-effect of indirect emissions leading to potential double counting. More importantly, as long as there are parallel public and private estimation methodologies that make it hard to compare between Scope 3 accounts, management of consistent ‘universes’ of emissions – something we have called ‘minting’ of emissions data – is needed to ensure comparability and monitorability of companies’ Scope 3 profiles.
Some in the financial industry are getting to grips with this continued need for estimation modelling and managed databases of Scope 3 carbon accounts. The head of responsible investment of a UK pensions fund, for instance, noted during a panel at the Environmental Finance ESG Data conference in London, October 2022: “on some carbon metrics, going for estimates for consistency is still better and much more impactful, just in terms of getting that comparability across the market.”
To come back to the sculptures of Studio DRIFT: what we can learn from this art practice is that its representational intervention is explicit in their sculptures. It is not hiding that what goes into a representation cannot simply be captured but needs to be actively produced, including making practical choices and judgement calls. Translated to Scope 3 carbon accounts, it does not necessarily mean avoiding estimations and modelling, but rather that there should be a higher level of transparency among companies and providers, and that financial institutions and other users of Scope 3 accounts acknowledge that estimates are an important part of creating accounts in the first place.
Header image: Studio DRIFT, GHG Protocol
What is the Climate Finance Dispatch?
How are green finance professionals actually “doing” green finance? How do they work with data and tools to understand topics such as climate risk and climate alignment? These are the questions the Warwick Climate Finance Research project has been busy seeking answers to since 2020. The Climate Finance Dispatch blog is the platform where we are sharing updates on empirical findings, theoretical and methodological insights, and fascinating stories from the field. The blog is for anyone with an interest in emerging practices and tools in finance dealing with the climate crisis.
Why we created the Climate Finance Dispatch
‘Green’ finance has made its way from the fringes of corporate social responsibility (CSR) to front page news stories, and the annual UN climate conferences. Despite this skyrocketing attention to headline announcements and developments within green finance, we know surprisingly little about how the constantly increasing number of green finance professionals actually ‘do’ green finance. How do asset owners discuss and decide in meetings which climate metrics to use to screen their portfolios? How do data providers on a day-to-day basis produce and curate their climate-related data? How do bankers bring climate considerations into their daily risk management routines? How do asset managers’ investment teams change their research and strategies on the ground? These are the questions our research and this blog address.
The project behind the blogLink opens in a new window launched in October 2020 under the lead of Dr Katharina Dittrich with a four-year funding grant by the UK Research and Innovation Council. Since then, we have been busy digging deep into the weeds of emerging practices around climate-related data, tools, and frameworks in the financial sector. The field of ‘green’ finance, and our specific field of (private) climate-related finance has already provoked important academic research. However, so far, few studies have focused on the on-the-ground, everyday work of finance professionals; how they connect to each other, and how they are forming market-based attempts of managing the climate crisis.
To fill this gap, our project applies a qualitative, ethnographic approach in which our team members follow practitioners at financial services companies (an asset owner, a service provider, a bank), and other organisations (an NGO and industry initiatives) engaged in climate-related finance in their daily work. In parallel, we conduct interviews with professionals across the field, and scan industry press and policy publications.
In our research so far, the vastness, the constant motion, and the diversity of the climate finance field stood out, prompting us to start this blog. First, its vastness confronts us with methodological and conceptual questions around how we as researchers can understand such an extensive and constantly changing field. Second, it motivates us to create this blog, trying to mirror the pace of the field by sharing insights outside of the slower-paced academic publishing process. Third, our aim is to capture the diversity of climate finance practice by sharing thoughts and stories on multiple topics, and in different formats. This is how we intend to go about it:
The layers of the Climate Finance Dispatch
Stories from the field. As ethnographic researchers, we spend a lot of time with climate finance professionals in their organisations; sit through meetings with them and conduct multiple interviews with them. We thus get unique insights into the seemingly mundane yet fascinating on-the-ground activities of climate finance; the everyday problems, and the grand dilemmas of actually doing green finance. The most insightful and surprising stories of such problems, dilemmas, and sometimes dramas we will share with you in our category ‘stories from the field’.
Discussions. As academics, we also seek to look beyond the individual situations and stories, and tease out what connects different practices within the field. To aid us, we develop and introduce concepts and theoretical frameworks to deepen our understanding of what we observe. In the ‘discussions’ section we want to share our reflections and ideas on conceptual questions, themes we identify in our data, and emerging findings.
Broader developments. The big headlines mentioned above, and the micro-practices our research focuses on are of course connected. What surfaces as grand announcement or decision by prominent actors such as the European Central Bank, the International Accounting Standards Board, or Mark Carney both depends on, and imprints on the seemingly mundane and the everyday. We therefore dedicate a category of our Climate Finance Dispatches to broader developments and how they are entangled with, and seep into the practices we observe in the field.
Guest posts. Given the extensive nature and multiplicity of the field of climate finance, we want to table the thoughts, reflections, and views of like-minded academics, as well as practitioners to this space as well. By including voices from outside our research team, we want to widen both the empirical scope and the conceptual approaches employed in the Climate Finance Dispatches.
Methods. Conducting an ethnography of an entire organisational field such as climate finance as a team is methodologically challenging. We want to share experiences we make, problems we encounter, and solutions we pursue in the methods category of this blog. In doing so, we want to advance both the still developing method of team-based and multi-sited ethnographies, and the broader methodological debates on making qualitative research more transparent.
How to keep in touch
Whether you are a student interested in green finance, an academic working on related topics or employing similar methods, or a professional in the field, the Climate Finance Dispatches have something to offer. You can keep in touch with the team by following us on TwitterLink opens in a new window and LinkedInLink opens in a new window or by getting in touch with us via email. We are always keen on connecting with like-minded academics and interested ‘sustainable’ finance professionals.
Stay tuned for more exciting stories and analyses.