Portfolio Decarbonization Coalition (PDC)

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Last updated: July 2018

Website: unepfi.org/pdc/

Contact: pdc@unepfi.org

Summary: The Portfolio Decarbonization Coalition (PDC) is a multi-stakeholder initiative launched in the run up to COP21 by Amundi, AP4, CDP and UNEP FI, the later also hosting the initiative’s secretariat. The PDC “seeks to support and catalyse the transition to a low-carbon economy by encouraging and mobilising institutional investors to decarbonize their investment portfolios”[1] and presents itself as aiming to be “fully action-oriented” as PDC members commit to a concrete decarbonization plan (asset owners and asset managers). As of May 2018, the PDC gathers 32 asset owners and asset managers “representing over $800bn in decarbonization commitments” [2].

What are the objectives of the initiative?

“PDC seeks to reduce global greenhouse gas emissions by mobilising institutional investors to decarbonize their investment portfolios. […] By offering a platform for these leading action-oriented investors, PDC aims to stimulate and catalyse further action by investors and to signal to policymakers and to companies that decarbonization is now a core concern for institutional investors, and that investors are committed to accelerating the transition to a low-carbon economy.”[3]

Who launched it? Who is participating?

The PDC was co-founded in 2014 by Amundi Asset Management, Fjärde AP-Fonden AP4, CDP (formerly the Carbon Disclosure Project) and UNEP FI. The PDC Secretariat is hosted by the UNEP FI office in Geneva.

“The members of the PDC commit to (i) measuring and disclosing, via the Montréal Carbon Pledge, the carbon foot-print of their investment portfolios on an annual basis, and (ii) taking action to decarbonize their investment portfolios. By offering a platform for these leading action-oriented investors to work together, the PDC aims to stimulate and catalyse further decarbonization efforts.” As of June 2018, the PDC gathers 32 asset owners and asset managers representing over $800bn in decarbonization commitments.

Why has this been put into place?

“There already exist a number of important investor and finance sector fora which investors can join to learn about climate change or to engage in dialogue with governments, legislators and other stakeholders. While the PDC will also offer ‘knowledge exchange’ and’ stakeholder dialogue’ opportunities it will differ from other networks because it will be fully action-oriented: all PDC members will commit to a concrete decarbonization plan.” [4]

What are the main work streams/areas of work?

PDC pursues different work streams:

  • Communication and outreach campaigns to secure investor commitments
  • Undertake research and analysis to resolve emerging questions, both procedural / technical as well as fundamental
  • Provide orientation services on how to fulfill commitments

What are concrete outcomes (both political and in terms of recommendations)?

In their 2017 Progress Update Report, the PCD notes that: “PDC signatories have made high-level commitments to decarbonization, and have started to implement decarbonization strategies across their portfolios. These actions are enabling PDC signatories to improve the carbon characteristics of their investment portfolios and funds, and to improve their investment performance…”

However, they also note that: “Despite these positive outcomes, there is limited information on how the portfolio decarbonization efforts of PDC signatories are affecting the real economy, as measured by, for example, changes in greenhouse gas (GHG) emissions, changes in the GHG-intensity of economic activity, the diversion of financial flows in the real economy, or changes in the share price of high emitting or high impact companies.”

Based on their experience since its launch, the PDC observes that: “Ensuring that the actions taken by investors to decarbonize their portfolios have a material impact on capital expenditure in the real economy and, ultimately, on GHG emissions trajectories in the real world will require a much more forceful and assertive approach to decarbonization from individual investors and from the investment community as a whole.”

Have intermediate or final reports / guidance been issued?

PDC publishes annual reports on the coalition’s actions:

It has put online resources and videos in line with the initiatives work on its website. Many of the reports have been produced directly or with support from UNEP FI.  These reports and resources include:

Calendar and milestones

Associated Supporting Institutions of the Climate Action in Financial Institutions Initiative being a member of the PDC:

[1] http://www.unepfi.org/wordpress/wp-content/uploads/2016/11/PDCreport2016.pdf

[2] http://unepfi.org/pdc/

[3] http://www.unepfi.org/wordpress/wp-content/uploads/2016/11/PDCreport2016.pdf

[4] http://unepfi.org/pdc/about/

Links with the 5 Voluntary Principles for Mainstreaming Climate Action

This section aims to support discussions on the implementation of the 5 voluntary Principles for Mainstreaming Climate Action. Information provided in this section is for reference only; the Climate Action in Financial Institutions Initiative, its Supporting Institutions and the Secretariat do not endorse the activities nor the guidance and information provided in this section.

The PDC establishes a link between decarbonization and climate risks management strategies.

From disclosure to action: The first annual report of the Portfolio Decarbonization Coalition (2015):

“Decarbonization can also enable investors to reduce the risks of valuation impairment or stranded assets as a result of regulation, and to increase their exposure to the winners of the energy transition and to the industries of the future. In fact, the case for action is so strong that many of PDC’s asset owner signatories now see that identifying and managing the investment risks and opportunities associated with climate change is an integral part of the fiduciary duties that they owe to their beneficiaries.”

The PDC emphasizes stakeholder engagement and coordinated investor action concerning the promotion of climate smart objectives.

Investment portfolios in a carbon constrained world: The second annual progress report of the Portfolio Decarbonization Coalition (2016):

“PDC members have encouraged companies to report on their direct and indirect greenhouse gas emissions and to take action to reduce these emissions. This engagement has been conducted directly with companies as well through collaborative initiatives such as CDP and the major investor climate change networks (the European Institutional Investors Group on Climate Change (IIGCC), the Asia Investor Group on Climate Change (AIGCC), the Australia/New Zealand Investor Group on Climate Change (IGCC) and the Investor Network on Climate Risk (INCR)). These collaborative initiatives have encouraged companies to disclose their climate change strategies (e.g. the CDP information requests), to set emission reduction targets (e.g. the Carbon Action initiative) and to take action on sector-specific issues such as gas flaring in the oil and gas sector.”

The first annual report of the Portfolio Decarbonization Coalition (2015) highlighted that PDC members considered that improving the climate performance of their portfolios was perceived as a strategy to guarantee the long-term performance of their portfolios.

“Perhaps the most significant conclusion to be drawn from this report is that, far from damaging investment returns, PDC members see portfolio decarbonization as a strategy that is likely to enhance long-term investment performance.”

The second annual progress report of the Portfolio Decarbonization Coalition (2016) identified the following priority areas:

The third annual progress report of the Portfolio Decarbonization Coalition (2017) pointed out a number of challenges:

“PDC signatories currently measure progress against their targets in financial terms and/or in terms of the carbon characteristics of their portfolios and/or in terms of their portfolio exposures to climate change. As yet, however, there has been limited analysis of how these activities have contributed to the wider goals of a low carbon economy; the notable exception are those few investors that have reported on the emissions avoided through their investment activities.”

“Ensuring that the actions taken by investors to decarbonize their portfolios have a material impact on capital expenditure in the real economy and, ultimately, on GHG emissions trajectories in the real world will require a much more forceful and assertive approach to decarbonization from individual investors and from the investment community as a whole.

The parameters of this challenge are yet to be fully defined but this report points to five headline conclusions:

  1. Engagement must be more outcome oriented. Individual and collective engagement initiatives should:
  2. Be explicit about the outcomes they wish to achieve.
    • Align with science-based targets or with the goals of keeping global temperature rise below 2 degrees Celsius.
    • Be clear about their additionally or what they are delivering above and beyond what would have happened anyway.
    • Commit to formally, regularly and publicly reviewing the outcomes that they have achieved, and be prepared to escalate if their goals are not being achieved.
  3. Engagement must be conducted at scale, bringing the leverage of large numbers of investors to bear.
  4. Investment decision-making must be explicit. Investors must explain how climate change is factored into their investment decision-making, and they must explain the role played by climate factors when making investment, divestment and over/underweighting decisions. This signaling is critical to enable companies and other stakeholders to see and understand the factors driving investment decisions.
  5. Investors must work together. Unilateral commitments to divestment, for example, have limited impact on companies’ share prices or cost of capital.
  6. Decarbonization must be about additionally. Investors must explain how the actions they are taking are additional to those actions that they would have taken anyway.”

If the PDC does not impose of type of accounting method, members do commit to calculate the carbon footprint of their portfolios by using different methods.

“The PDC is agnostic as to how (method employed) investors commit to calculating their carbon-footprints, but PDC members will have to fully disclose the method used in calculations. However, in 2015 the Greenhouse Gas Protocol and UNEPFI will issue guidelines aimed at standardizing and harmonizing portfolio carbon-footprinting and disclosure worldwide.

For now two approaches are feasible:

  1. After the decarbonization exercise, the carbon-footprint of the corresponding portfolio(s), if benchmarked, should be significantly lower than that of the underlying benchmark(s). In the case of absolute-return portfolios the portfolio footprint post-decarbonization should be significantly lower than the footprint pre-decarbonization.
  2. Investors are also welcome to submit climate-oriented capital-reallocation strategies which are not based on reductions of the portfolio carbon-footprint. In these cases decarbonization can be measured by the amount of capital re-allocated on the basis of climate-related objectives.
  3. Investors can also provide a description of the outcome(s) resulting from a corporate engagement exercise, and where possible, an estimate of the reduction of GHGs from that exercise.”

From disclosure to action: The first annual report of the Portfolio Decarbonization Coalition (2015):

“The targets used to track, assess and report on investors’ portfolio decarbonization efforts can be defined in a variety of ways. In broad terms, investors should report on:

  • The coverage of the target (specifically, on the proportion of the portfolio or the total assets covered by the target).
  • The subject of the target (e.g. is the focus on emissions, on specific sectors or activities that are or are not being invested in).
  • The specific outcomes being sought.
  • The timeframes over which these outcomes are being sought.
  • The actions to be taken to deliver the target.”

Portfolio investment in a carbon constrained world: The third annual progress report of the Portfolio Decarbonization Coalition (2017) presents the TCFD framework as a catalyst of portfolio decarbonization: “Almost all PDC signatories agree that the TCFD framework will be of great usefulness in improving the availability of data needed to inform investors’ decarbonization strategies and decisions. There is particular interest in the potential for companies to provide more forward-looking data, and analysis that goes beyond assuming that current regulatory and technological circumstances will continue to persist into the future.

Most PDC signatories agree that institutional investors should prepare TCFD-compliant disclosures themselves. However, respondents noted that standardized approaches and best practices are not available, and that there is a lack of data on how the financial risks of climate change should be assessed or reported against.”