Introduction

“Science, including the science of economics, can help discover the causes and effects of climate change. It can also help work out what we can do about climate change. But what we should do is an ethical question.”

J. Broome, philosopher and contributor to the Intergovernmental Panel on Climate Change (2008)

Investment industry participants have worked to establish a foundation for environmentally-focused investing that is grounded in science rather than relying on values; modern sustainable investing is a far cry from the early ethical investment strategies of the mid-twentieth century. Yet when it comes to carbon emissions and ‘climate investing’ we find that, underneath even the most apparently scientific data-driven processes, certain key decisions are unavoidably ethical in nature. Various essential steps, such as the selection of targets and metrics, cannot be standardized based on scientific principles and instead require ethical choices. Indeed, the heterogeneity of climate metrics and methodologies—a challenge that continues to provoke calls for standardization—can often be traced, at least in part, to unspoken ethical divergence. This creates something of a practical challenge for many investors and practitioners that have not explicitly defined the ethical basis of their stance.

This article, which draws on analysis presented in Bouchet (2025)1, introduces three different ethical archetypes: principled, utilitarian and harmonist. Investors can consider which of the three might represent the most appropriate ‘fit’ with their own position. It then presents decisions that could follow from each viewpoint during the development of a climate alignment model and, finally, considers the extent to which those choices affect data outcomes for an equity portfolio comprising the 1,300 largest developed market stocks.

Intro Hidden Ethics in ‘Scientific’ Methodologies

Investors considering how to align equity portfolio ‘emissions’ with climate-related targets are immediately faced with a daunting reality: the significant inconsistencies between different methodologies. ILB (2020)2, for example, found that implied temperature rise metrics for the same index varied between1.5°C and 3°C depending on which approach was used, while correlations at the company level were weak or even negative. Points of differentiation included the scope of emissions considered, the carbon budget allocation, the reference scenarios and time horizons (Haalebos and Fouret, 2022; de Franco et al., 2023; Bouchet, 20243).It would appear, at first glance, that standardization of methodologies would be highly desirable. Indeed, many bodies have asserted that a consistent approach should be pursued (FOEN, 2022; GFANZ, 2022a; OECD, 20224). After all, a uniform approach would simplify comparisons across methodologies, enhance transparency for both institutional and retail investors, and facilitate regulatory assessments. Moreover, there is a widespread presumption that a ‘science-based’ approach should be able to produce a definitive and universally agreed way forward for all measurement methodologies.

However, the field continually resists efforts to achieve consensus. The reason: decisions cannot be determined by scientific criteria alone and, as such, frequently rely on ethical choices (with which others may well disagree). Yet these crucial ethical foundations tend to be unspoken and, as a result, are insufficiently scrutinized. In this article, we assert that investors and industry practitioners should clearly define the ethical basis of their approach.

First, we examine five key methodological steps involved in constructing a climate alignment metric: choosing a reference scenario, defining allocation among companies, projecting company activity, measuring company alignment, and aggregating alignment at the portfolio level. In our analysis, the most significant ethical decision is the allocation of the carbon budget among companies within a sector. Throughout, we prioritize feasibility in order to support a pragmatic approach for an investor seeking to address this subject today.

Second, we review ethical frameworks that may inform the dilemmas associated with climate change mitigation. These include the categorical imperative (Immanuel Kant), utilitarianism (John Stuart Mill), egalitarianism (John Rawls) and the principle of responsibility (Hans Jonas). We also consider some political principles and agreements that have been developed in the context of climate change mitigation. Three ethical investor archetypes are derived: the principled investor grounded in moral philosophy; the utilitarian investor maximizing monetary utility under climate constraints; and the harmonist investor advocating for an extended scope of responsibility.

Finally, we model three alignment methodologies that reflect these three ethical archetypes using a diversified equity portfolio of the 1,300 largest publicly traded companies in developed markets and assess the greenhouse gas overshoot (the projected excess emissions relative to a reference scenario). In this analysis, we find that the three different approaches produce quite similar results at the portfolio level, but a significantly different level of alignment within the most climate-relevant sectors. In particular, methodologies using production intensity rather than absolute emissions tend to reduce overshoot for companies in these sectors.

Based on this analysis, we would argue that standardized uniform metrics for climate alignment are not appropriate. The significance of ethical choices in their construction means that the industry should continue to offer a variety of approaches. Meanwhile, investors should make deliberate choices that are consistent with their own clearly defined and transparent ethical stance.

Authors

Vincent Bouchet
Director of ESG & Climate Research,
Scientific Portfolio ……………………………………….
.

Shahyar Safaee
Deputy CEO and Business Development Director,
Scientific Portfolio

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