Temperature Scores: A Guide to Climate Alignment Metrics

How can investors compare companies’ varied emissions targets? Temperature scores translate complex goals into a single, intuitive metric. Here’s how they work and how to use them effectively.

Quick Overview

• Temperature scores convert varied company emissions targets into comparable metrics
• They indicate potential temperature outcomes from companies’ emission reduction efforts
• Scores help assess alignment with Paris Agreement goals
• Major data providers use different methodologies but broadly align with industry best practices

Understanding Temperature Scores

Companies set emissions reduction targets that can vary widely in terms of target date, level of reduction, scope of emissions, and exact metrics being targeted. This variation makes it challenging to compare targets across companies, especially when considering regional and sectoral differences.

Temperature scores help address this challenge by assessing these diverse targets and assigning companies an intuitive “temperature score,” making them more comparable. These scores estimate the global temperature rise associated with a company’s greenhouse gas emissions or those of a portfolio.

How Temperature Scores Are Calculated

The process involves four key steps:

1. Select reference climate scenarios: Using established scenarios from organisations like the Intergovernmental Panel on Climate Change (IPCC), Network for Greening the Financial System (NGFS), or the International Energy Agency (IEA)
2. Develop benchmarks: Converting reference scenarios into company, region, or sector-level emissions pathway benchmarks
3. Project future emissions: Forecasting a company’s emissions trajectory using current emissions, stated targets, and credibility assessments
4. Calculate temperature score: Comparing the company’s pathway with benchmarks to determine final score

Data Provider Approaches

The two major data providers we analysed – MSCI and ISS – cover over 16,000 and 30,000 companies respectively, with monthly updates. They use different methodologies and reference scenarios, but both are broadly aligned with the Glasgow Financial Alliance for Net Zero’s (GFANZ) recommended criteria, including their approach to emissions scope coverage, baseline quantification, and forward-looking estimations.

Applications for Investors

Temperature scores can be utilised in several ways:

• Reporting
  Report portfolio temperature scores as part of climate-related disclosures
• Engagement
  Engage with companies regarding their emissions reduction goals
• Target-Setting
  Set portfolio targets based on temperature scores, particularly relevant for investors with net zero or climate goals
• Investment Decisions
  Research companies’ emissions targets and potentially implement portfolio tilts based on these scores

Key Considerations

Overall, our analysis identified some of the key benefits and challenges of temperature scores:

So while temperature scores can be intuitive to understand and may be easy to communicate, the methodologies underlying such metrics are complex and need to be understood. As our analysis has shown, even though data providers can broadly be aligned with industry best practices, the scores can be quite different at a granular level due to different modelling assumptions. However, these scores have the potential to provide complementary information relative to other types of climate data metrics, and can provide a forward-looking opinion of a company’s emissions trajectory.

For detailed analysis of temperature score methodologies and empirical findings across major indices, download our full report.