Austria’s Environment Agency has teamed up with some of the country’s largest financial institutions to pilot a new climate metric designed to measure portfolio decarbonisation progress.
The metric, indicators for portfolio-related emissions performance (I-PEPS), is applicable across investment, lending and insurance portfolios.
I-PEPS is the brainchild of the Green Finance Alliance (GFA), a group of financial institutions convened by the Austrian government that have committed to a series of requirements, including publishing a climate strategy and a gradual phase-out of fossil fuels.
Pedram Payami, a senior green finance expert at the Environment Agency, said that under the GFA requirements, members have to use a certain target-setting methodology to decarbonise their portfolios.
Members can use the Science Based Targets initiative (SBTi) but the agency wanted to offer them an alternative, Payami said. “There’s not really a suitable second option that fits our mix of banks, insurance companies and investment portfolios.”
When it comes to portfolio decarbonisation metrics, “we are not really happy with most of the existing market methods out there”, he continued.
Using financed emissions as a metric for decarbonisation “is not perfect” especially “without doing quite time-consuming attribution analysis”, Payami added, noting that is “especially problematic” for smaller GFA members.
I-PEPS is calculated based on the decarbonisation performance of a company or asset from year to year, multiplied by either the investment’s portfolio weight, its share of portfolio emissions, or a combination of both depending on how much influence the financial institution has on the asset’s decarbonisation.
For instance, an impact fund would multiply decarbonisation performance by the asset’s share of portfolio emissions alone, whereas a portfolio of sovereign bonds – where an investor has much greater difficulty influencing the decarbonisation trajectory – would be multiplied by portfolio weightings.
The calculation only uses reported emissions data. Even if there is low coverage, Payami said the agency prefers this to having “high coverage with vague emissions-factor based data”.
“It’s very difficult to steer portfolio decarbonisation with metrics that actually need to undergo a very thorough attribution analysis until you get proper data,” he said.
Three banks including UniCredit’s Austrian branch are taking part in the initial pilot, as is Austria’s second-largest insurer UNIQA and the country’s largest pensions provider VBV.
Austria’s other major banking groups, Erste Group and Raiffeisen Bank International, are not members of the GFA, although two local Raiffeisenbanks are. A spokesperson for the Vorarlberg arm of the group said it was unable to take part in the pilot due to internal resources being used for other sustainability topics.
The Environment Agency is now recruiting more broadly for financial companies that want to test the metric with professional support as part of a second phase.
“The experiences we have gained so far in the pilot phase have shown that the calculation is really quick, so fewer internal resources are being stuck into this project of target-setting and calculations,” Payami said.
He added that the results look “robust” across insurance, investment and lending portfolios.
While the Environment Agency saw “astonishing” international interest when developing the metric last year, and has seen significant interest from Austrian institutions for the second pilot, Payami said there has not yet been much demand from outside Austria for the second pilot.
Pilot experiences
Martin Zenker, head of group ESG at UNIQA, said there is currently no science-based framework for setting climate targets for its underwriting portfolio, so the Austrian firm is exploring the use of I-PEPS to fill that space.
Zenker said the metric “closes an important gap” and is a good option for target-setting, especially noting its focus not only on absolute emissions but on decarbonisation performance.
However, he added that data quality and the unavailability of reported data, especially for smaller companies, might be an issue when using the framework.
Bettina Riedl, an ESG specialist at VBV, said the market has been “flooded” with sustainability-related standards and regulations over the past few years.
“We felt that the introduction of another new concept – including the idea to set additional targets for our investment portfolio and report on results – needed further critical thoughts of those institutions who are supposed to use it, hence we wanted to test the practical applicability of the I-PEPs framework,” she told Responsible Investor.
Riedl praised the detail of the I-PEPS standard but said some details – such as how to approach data inconsistencies and when to exclude “implausible data points” – need further attention.
“The most difficult part is not the calculation itself, but the interpretation of the results and drawing the right conclusions for our investment portfolio,” she said.
“Adding a new framework to established standards always requires new thinking. We see I-PEPs as a complimentary tool in our mission to transitioning our investment portfolios towards climate neutrality.”