What Is the Montreal Carbon Pledge?

The Montreal Carbon Pledge is an environmental initiative launched by the United Nations (UN) project, Principles for Responsible Investment (PRI). Its purpose is to encourage investment management firms to monitor and disclose the carbon footprint of their investment portfolios.

Key Takeaways

  • The Montreal Climate Pledge is an initiative encouraging investment management firms to monitor and reduce the carbon emissions associated with their investment portfolios.
  • It is associated with the UN's PRI program.
  • The number of firms participating in this program has increased significantly since it was launched. However, the extent of involvement of these firms can vary quite substantially.

Understanding the Montreal Carbon Pledge

Since launching in Sept. 2014, the Montreal Carbon Pledge has been very successful in acquiring new participants. Its original objective was to recruit participating institutions with assets under management (AUM) totaling $3 trillion, aiming to achieve this goal prior to the UN COP 21 conference which took place in Dec. 2015. By the time this conference took place, however, the initiative had attracted participants with AUM totaling over $10 trillion.

This momentum has only accelerated in recent years. By the end of 2018, over 2,200 investment managers had signed on to the stated goals of the PRI—an increase of over 20% relative to the prior year. Recent signatories include pension funds such as Switzerland's Novartis, the Employees' Retirement System of the State of Hawaii, and the Government Pension Fund of Thailand. Overall, the most significant percentage gains were made in Asia, which saw a nearly 30% increase in new signatories.

The exact actions undertaken by these firms can vary substantially. On the one hand, firms might simply signal their general intention to consider climate change and related issues when making investment decisions, without implementing specific programs to ensure this takes place. Other firms might commit to and report upon far more rigorous initiatives, such as making environmental factors central to their procedures for selecting investments and investment managers.

Real World Example of the Montreal Carbon Pledge

A portfolio's overall carbon footprint is measured by summing the emissions of each company in the portfolio proportional to the amount of its stock that the portfolio contains. An investor can also choose how much of the portfolio to measure and how often. For example, an investor might measure the carbon footprint of the equities portion of the portfolio or the part of a portfolio that represents a specific geographic region. The more areas that are measured, the more the investor will learn about the portfolio's overall carbon footprint. Third-party providers can also be hired to calculate a portfolio's carbon footprint.

Once measurements are available, investment managers need to analyze the data, making sure they understand the measurement methods used and any shortcomings (such as estimated data), then compare the results to a benchmark and decide how to act on it. Actions might include taking steps to lower the portfolio's carbon footprint, talking with the companies within the portfolio about their carbon footprints, and discussing findings and their implications with the portfolio's investors. They might choose to reduce their exposure to holdings with a large carbon footprint or to actively invest in companies with low carbon footprints, but they are not required to do so.

Signatories are expected to provide their annual carbon footprint disclosure through their website, annual report, sustainability report, responsible investment report, or other publicly visible reporting channel. Stakeholders may want to know how signatories view their findings and how they will address them. It is important for signatories to be clear about what they have measured, what progress they have made, what initiatives they have planned, and what setbacks they have experienced and to offer stakeholders the opportunity to provide feedback.