3 motivations and challenges for investors adopting temperature scores

In the evolving landscape of sustainable investing, a new metric is gaining traction: temperature scores. Moving beyond traditional carbon accounting, temperature scores assess the impact of a company or an entire portfolio on global warming. This forward-looking approach empowers both companies and investors to make data-driven decisions that align with climate goals and contribute to a more sustainable future.

Ana Bernal, Head of Product at Datia, and her team researched extensively to understand the reasons behind the financial sector’s interest in temperature scores, as well as the challenges they face in adopting them. In this article, we will summarize the findings as well as solutions moving forward. 

‍3 drives for investors to embrace temperature scores‍

1.  “Climate leaders” favoritism

“We have been seeing a lot of interest from asset managers in favoring companies who are ‘climate leaders’. Some asset managers go as far as to use science-based targets as a screening factor to identify eligible investors, given their commitment to carbon reduction and the Paris Agreement”, explains Bernal. 

2. Demand coming from institutional investors

Another important factor is that institutional investors are increasingly attracted by the disclosure of science-based targets. Therefore, asset managers see that providing this data about their financial products can be a competitive advantage. 

3. Future costs associated with carbon emissions

There are several ongoing efforts from different governments to make polluters internalize the costs of carbon emissions. The consequence is that companies with high emissions may face increasing costs. From investors’ perspective, potential costs such as carbon taxes might directly impact their returns. Temperature scores have been, therefore, seen as a simple way to forecast the risk of a company to incur such costs in the future.

Read more about the efforts to price carbon emissions on the World Bank’s website.‍

3 challenges to adopting temperature scores

Investors face several challenges in incorporating temperature scores in their assessment of companies. 

1. Data collection 

Collecting emissions data by the companies as well as the companies’ temperature target ambitions requires a lot of manual work, which leads to human errors. The entire process is time-consuming and requires resources.

2. Limited coverage

The list of companies that set science-based targets is currently limited. But, according to the Science Based Targets initiative (SBTi), the number of companies has increased exponentially. In a 2023 report, SBTi announced an 87% increase in the number of companies up approved targets and commitments from 2021 to 2022. From working closely with SBTi’s team, Datia’s team learned that this number is expected to continue growing.

3. Data analysis

Making sense of the data collected is another challenge. Simply collecting the companies’ emissions and their targets does not lead to clear assessments. Combining such data to create temperature scores, therefore, is a preferable solution. 

Methods for calculating temperature scores

There are a handful of methodologies to help companies and investors calculate temperature scores. However, the CDP-WWF temperature rating methodology is the more widely used method. The renowned and open-source methodology was developed and has been maintained by CDP Worldwide and the World Wide Fund for Nature (WWF) since October 2020. 

Recently Donald Linderyd, Sustainable Finance Senior Project Manager at WWF, joined Datia’s webinar “WWF & Datia: How to leverage Temperature Score for your sustainable finance strategy” and gave a background for the vision behind the CDP-WWF temperature rating methodology, as well as an overview of its current adoption by the financial industry. 

‍

“We want the temperature ratings to exist in whatever commercially distributed or proprietary IT solution”, explained Linderyd. “Our vision was that the temperature score would sit next to metrics such as valuation, leverage, efficiency, credit ratings, etc. Therefore it would become a daily part of the investment process. That is how you change the way you view your investments”. 

Even though the methodology and code are publicly available, there are still challenges to guarantee that the financial industry can widely adopt temperature scores. “Availability of data is a challenge. Temperature target data is especially hard to come by. Once you get ahold of that data, the ETL (extract, transform, and load) process can be rather labor-intensive. And that is how solutions such as Datia’s come into play. It removes the workload and brings the temperature score to investors so they can use it”, says Linderyd. 

Linderyd estimated that about 30% of financial institutions, including institutions like Schroders and Amundi, use the CDP-WWF temperature rating methodology for setting their targets. The methodology has also been implemented in systems managed, for example, by Bloomberg and the New York Stock Exchange. And it is now also available to Datia’s customers. 

How Datia can help 

To help solve challenges faced by investors trying to integrate temperature scores into their investment process, Datia launched the Temperature Score Screening Module. The tool was meticulously designed to integrate the renowned CDP-WWF temperature rating methodology, open source data from the Science Based Targets initiative (SBTi), and companies’s emissions data supplied by Datia. The result is the seeming unveiling of a portfolio's short, mid, and long-term temperature score and several other metrics that can help asset managers and asset owners align their investments with the Paris Agreement. 

The top-performing companies and laggards are also identified. Investors can sort the information in different time frames and filter by industry, as well as compare their portfolios with indexes, funds, and benchmarks. 

Learn about the Temperature Score Screening Module.