This paper sets out the concept of ‘Cumulative Benchmark Divergence’ (‘CBD’) and shows how it can be applied to assess the alignment of forward-looking corporate carbon targets. CBD quantifies the projected cumulative emissions performance of a corporate (or real asset) relative to a Paris-aligned decarbonisation pathway, over a defined timespan.
We suggest that its use can also complement the main approaches to portfolio alignment used by investors, such as those included within the Net Zero Investment Framework (NZIF).
When applied to benchmark and company pathway data from the Transition Pathway Initiative Centre (TPI Centre), CBD offers significant advantages on other corporate target assessment methods; it can provide a robust, transparent and quantitative measure of target (mis)alignment. These advantages extend to its use at a portfolio level, also providing consistency between asset and portfolio approaches. While its use is currently limited by data availability, we anticipate the underlying company-level disclosures and analysis ramping up significantly over the next few years, permitting wider investor adoption.
The paper also describes the application of CBD at an asset and portfolio level, and compares against existing approaches in both instances. While the focus in this paper is on the application of CBD to corporates—and particularly listed equity—the technique could be applied to other asset classes (e.g. sovereigns, real estate) in time.
IIGCC members looking to apply CBD at both asset and portfolio level can refer to our accompanying implementation guidance - check your 15 February newsletter for more information.
