Jaakko Kooroshy
Stephanie Maier
Data from the Transition Pathway Initiative (TPI) provides a valuable framework and forward-looking metrics for investors to assess climate transition risk at a corporate and portfolio level.
TPI was launched in 2017, when a group of UK asset owners came together to partner with a team of academics at the London School of Economics (LSE), and FTSE Russell, an LSEG business, to develop a framework to measure how companies are managing the transition to the low carbon economy. This was captured in two scores: the Carbon Performance (CP) score provides a quantitative assessment on how a companies’ emission intensities and targets stack up against peers and sector decarbonisation pathways in high-emitting sectors; and the Management Quality (MQ) score, which measures how a company manages its GHG emissions, and the risk and opportunities related to low carbon transition.
The initiative has come a long way since. The methodology is today supported by over 150 institutional investors globally, representing over $80 trillion in assets under management (AUM).[1] TPI scores are now widely used to inform investment decisions, engagement, voting, and portfolio reporting. Importantly, this also includes the use of TPI data as part of index investment strategies. Since the launch of the first TPI index in January 2020, index solutions leveraging TPI data have now expanded to over $100 bn in assets under management.
This success is underpinned by a steady expansion of the coverage of the dataset, which has grown over 300-fold since its initial launch in January 2017 – when it covered just 40 companies in two sectors.[2] Today, TPI MQ scores for ca. 2000 companies are publicly available and updated annually on the TPI Centre website (with ca. 500 of these also including TPI CP scores). LSEG has scaled this coverage to provide TPI MQ scores for almost 15,000 companies; covering major investment benchmarks across all sectors and regions and including underlying metrics and source texts. The underlying metrics that are used to calculate the MQ scores are also available as part of Climate MAP in LSEG Workspace.
Figure 1 compares the distribution of these scores across the c. 10,000 listed equities in the FTSE All Cap Index, covering large, mid-sized, and small companies in advanced and emerging economies. It shows that the largest companies in the most carbon intensive sectors – which are featured on the TPI website – are much more likely to have advanced climate strategies, with 83% integrating climate into operational decision-making (MQ score 3 and above). In comparison, the management practices of the bulk of companies in the broader investment universe, including many smaller companies in emerging economies, are still much less developed. Indeed, 48% have not progressed beyond the capacity building stage (MQ score 2 and below).
Figure 1: Distribution of TPI MQ scores in the FTSE All-Cap Index by number of companies[3]
Using TPI MQ scores to assess transition plans
TPI MQ scores provide a useful signal on the credibility of a company’s transition plans, by assessing climate policies and governance alongside reporting on emissions and targets. This matters because transition efforts will take several years before being reflected in emissions disclosures and real-world management commitment to lofty emission reduction goals can be hard to assess.[4]
While tricky to measure, such differences in management intentions make a material difference over time. In a 2023 study, we showed that, across a sample of over 2000 large and medium sized listed companies, firms with high TPI MQ scores are more likely to decarbonise, and on average decarbonise faster over the following three years, than those with low TPI MQ scores.[5]
Two years on, Figure 2 extends this analysis using the latest available data – enabling us to expand the universe of companies assessed by c. 10% and to add two additional years to the time series.[6] It shows that the relationship between TPI MQ scores and future decarbonisation rates remains robust across this extended sample, and can also be replicated across subsamples (see Table 1 below) and changing analytical specifications, such as choosing different start years.
Figure 2: Average annualised change between 2019-2023 in Scope 1 and 2 carbon emissions per TPI MQ score in FTSE All-World (N=2240)[7]
A high TPI MQ score does not guarantee future decarbonisation of companies. However, all else equal, this analysis supports the correlation to ‘real world’ emission reductions. This makes these scores a useful tool for investors to assess the companies transition plans alongside other metrics, and a confirmatory signal for ambitious emission reduction goals.
Table 1: Annualised percentage change (2019-23) in Scope 1 and 2 Emissions by FTSE All-World segment
|
TPI MQ Score (2019) | |||||
|---|---|---|---|---|---|---|
| 0 | 1 | 2 | 3 | 4 | 4* | |
| Developing Market (n=1254) | -1.81[8] | 2.25 | 0.06 | -2.87 | -4.76 | -9.39 |
| Emerging Market (n=986) | 11.93 | 5.46 | 0.74 | 1.01 | -3.82 | -5.66 |
| Carbon Intensive Industries[9] (n=838) | 8.42 | 3.34 | 0.67 | -1.73 | -4.07 | -7.28 |
| Other Industries (n=1402) | 4.00 | 4.83 | 0.25 | -1.68 | -4.74 | -8.56 |
| Large-sized[10] (n=1101) | 8.33 | 7.98 | 3.77 | -1.33 | -4.83 | -7.55 |
| Medium-sized (n=1139) | 2.95 | 1.07 | -2.36 | -2.04 | -3.96 | -10.62 |
* More analysis from LSEG’s sustainable investment experts can be found in our Insights pages here. Alternatively, if you are a Workspace user, find our analysis on the Research and Insights app.
[1] Assets Under Management (and Advice) are subject to market-price and foreign-exchange fluctuations. As the sum of self-reported data by TPI supporters, they may double-count assets.
[2] TPI (2017) Methodology and Indicators Report.
[3] MQ score 5* (all levels met) is omitted in the Figure there is currently no company in the dataset scoring.
[4] See Are corporates walking the walk on climate pledges? | LSEG. Similar results have been found for a broader sample in a recent academic study in Nature Climate Change.
[5] Read more on our previous study in Deliberate decarbonisation.
[6] We use the v4 version rather than the v5 version of the methodology here, as it offers longer history.
[7] The study expanded its universe from 2075 to 2240 for 2024 FTSE All-World companies with TPI MQ Score as of September 2019. This includes 1,352 companies that continuously reported Scope 1 and 2 emissions from FY2019 to FY2023, while the remaining 888 companies disclosed data up to FY2022. The time-period was extended to 2019-2023, using updated 2019 scores and the latest Scope 1&2 emissions data.
[8] Note that Developed market companies with a TPI MQ score of 0 (unaware) are relatively rare (<4% of the sample) and consist mainly of smaller companies, over 80% of which are from sectors with low carbon intensities.
[9] Carbon Intensive ICB Industries include Energy, Basic Material, Industrials, and Utilities.
[10] Size markers are based on rules specified in section 7 of FTSE Global Equity Index series.
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