Author Details

Rumi Mahmood

Rumi Mahmood

Vice President, MSCI Research

Helen Droz

Helen Droz

Vice President, MSCI Research

Social Sharing

Extended Viewer

What Implied Temperature Rise Means for Funds

  • There is only so much more additional carbon we can emit if we are to keep global temperature rise between 1.5°C and 2°C. We can measure a fund or portfolio’s alignment to climate targets with an aggregated-budget approach.
  • Analysis of the MSCI Fund Universe, consisting of over 65,000 funds found that approximately 10% of funds exhibited an implied temperature rise of 2°C or less, while 80% fell somewhere between 2°C to 4°C.
  • Close to 6% of funds exhibited implied temperature rise over 5°C. They largely focused on emerging markets, high intensity sectors such as energy or utilities and small- to mid-cap firms without emissions reduction targets.

COP26 is over. Now the hard work for the financial and investment industry resumes as they seek to limit global temperature rise to less than 2°C, and preferably less than 1.5°C, above preindustrial levels in their portfolios. But how can we understand whether a portfolio or fund is actually well aligned with these temperature targets? How can this be measured? As discussed in our previous blog post, Measuring the Temperature of Your Portfolio, translating portfolio holdings into a projected temperature rise over the coming decades is no simple task.


Setting and Assessing Carbon Budgets

For starters, there is only a set amount of additional carbon we can emit into the atmosphere. The Intergovernmental Panel on Climate Change has stated that, from the beginning of 2020, the remaining global carbon budget allowed if we are to limit warming to 2°C was just 1,150 gigatons of CO2.1 This concept of a carbon budget is also important when assessing the temperature alignment of portfolios or funds.

The Task Force on Climate-related Financial Disclosures (TCFD) Portfolio Alignment Team has suggested using an “aggregated-budget approach in order to maximize the scientific robustness of their disclosures.”2 To achieve this, it is necessary to determine a fund’s total carbon budget and the extent to which the fund is currently projected to over- or under-shoot that budget. Just think of the fund as one large company comprised of many smaller underlying companies.


Step 1: Company Carbon Budgets

We begin by looking at those individual companies as shown in the exhibit below, first determining their carbon budgets (shown in blue), and then calculating their projected budget over- or under-shoots (shown in red/green). This is based on a forward-looking assessment of the company’s carbon emissions, taking into consideration any reduction targets they may have.3


Step 2: Fund/ Portfolio Carbon Budget by Ownership Stake

For each underlying company, we then determine the ownership stake (shown in turquoise) and subsequently the prorated portions of carbon budget and carbon budget over- or under-shoots owned by the fund or portfolio.4


Step 3: Fund/ Portfolio Carbon Budget

Summing the aggregate contributions of financed budget and budget over- or under-shoots, we arrive at the fund or portfolio’s overall carbon budget, and it’s overall over- or under-shoot (shown in dashed red below).

With the science-based Transient Climate Response to Cumulative Emissions (TCRE) approach, the relative budget overshoot can be translated into degrees of temperature rise. The global implied temperature rise is quantified on the basis of the entire global economy having the same carbon budget over- and under-shoot levels as the portfolio or fund in question. This provides a forward-looking assessment of its alignment to global climate targets.


The Temperature Landscape of Funds

Using this approach, we found that approximately 10% of the fund universe exhibited an Implied Temperature Rise of up to 2°C, while 80% fell somewhere between 2°C to 4°C, as of Nov. 15, 2021, based on the aggregate commitments of the underlying companies in a given fund as they are today.5 Approximately 6% of funds exhibited an Implied Temperature Rise in excess of 5°C — mainly those largely focused on emerging markets, high-intensity sectors such as energy and utilities and small- to mid-cap companies that have yet to outline emissions reduction targets.


Fund Implied Temperature Rise Distribution for MSCI Fund Universe

No. of Funds: MSCI Fund Universe consists of more than 65,000 funds with over 65% of MSCI’s Implied Temperature Rise coverage selected. Source: MSCI ESG Research LLC, as of Nov. 15, 2021.

As climate considerations become more integral to corporate strategies and to investors’ portfolios, more companies may commit to reduction targets, and more decarbonization measures integrated into portfolio construction, thereby shifting the distribution of the fund universe’s implied temperature rise lower.



1For a 66% chance of success. Source: “Climate Change 2021: The Physical Science Basis Summary for Policymakers.” Intergovernmental Panel on Climate Change, 2021.

2“Measuring Portfolio Alignment: Technical Considerations.” TCFD Portfolio Alignment Team, October 2021.

3Please see the MSCI Implied Temperature Rise Methodology for more details on how a company’s temperature alignment can be calculated.

4The ownership stake allocation base used to define a fund’s financed stake is enterprise value including cash (EVIC).

5The fund universe consists of 65,000+ equity funds with over 65% MSCI Implied Temperature Rise coverage selected.



Further Reading

Measuring the Temperature of Your Portfolio

Stress Testing Portfolios for Climate-Change Risk

MSCI Implied Temperature Rise Methodology

Implied Temperature Rise