From a business management perspective, this point is obvious: to be useful in shaping strategy, a metric has to be something with a direct influence on investment decisions. And from a financial markets perspective, it has to be relevant to understanding risk and return. A lack of meaningful, consistent metrics makes it hard, or impossible, for investors to construct viable portfolios by comparing climate performance across firms. And that, in turn, dampens the incentive of those firms to improve and disclose their climate performance in the first place. 23  https://www.fsb-tcfd.org/wp-content/uploads/2019/06/2019-TCFD-Status-Report-FINAL-053119.pdf 9  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  9  Chart 4: Correlations between environmental scores from different rating providers24  Key Each matrix displays correlation coefficients between Environmental ratings given by five rating providers (labelled P1 – P5 in the charts) on a sample of 924 firms (2017 data). Right: Correlation coefficients between aggregate Environmental ratings. Below: Correlation coefficients between ratings of a selection of more granular environmental categories.
A ‘tilt’ strategy starts from the same investment universe as a standard market capitalisation-weighted index, but then adjusts the weights on individual securities or sectors in that index up or down to reflect various climate factors. A common tilt might be ‘low carbon’, in which portfolio weights are adjusted based on a measure of each issuer’s carbon footprint – or better still a forward-looking assessment of an issuer’s transition trajectory to net zero, such as that produced by the Transition Pathway Initiative.39 Tilt strategies avoid binary composition issues of the previous strategies, and can be dynamic in nature as the parameters used to construct the portfolios evolve. But they can be more reliant on those very consistent, decision useful and forward looking metrics I mentioned earlier, which are not yet universally available. 39  https://www.transitionpathwayinitiative.org/. 19  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  19  ‘Unconstrained’ investment – the final category in the chart – is a catch-all for the wide variety of active management strategies that investors can employ, either across an entire portfolio, or as an overlay. Such strategies may for example be driven by top-down or bottom-up research, or by quantitative statistical analysis of correlations between environmental factors and risk-adjusted returns. While such approaches have at least the potential to deliver stronger performance, by substituting judgment or modelling for current data gaps, they are clearly more costly to undertake and harder for end-investors to monitor.