Clarifying hidden ethics in climate investing

“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)

In "A Question of Ethics? Climate Alignment in Equity Portfolios" (2025) (1), Vincent Bouchet - Scientific Portfolio (an EDHEC Venture) Director of ESG and Climate research - shows how ethical frameworks can affect methodological decisions, resulting in very different ‘alignment’ calculations. He outlines three ethical archetypes—principled, utilitarian, and harmonist—inviting investors to consider which best aligns with their own stance. 

The study then explores the decisions that could stem from each perspective in the design of a climate alignment model, and finally examines how these choices shape data outcomes for an equity portfolio of the 1,300 largest developed market stocks (2).

The findings – which rely on previous work by Bouchet et al. (3) and incorporate 2024 IPCC AR6 scenarios for sectoral decarbonization pathways - raise key questions. Is it appropriate to pursue standardization for key metrics in this sector? Should investors who engage with measuring or reducing portfolio-related emissions take steps to define a coherent ethical position?

• On October 16, 2025, Vincent Bouchet gave a webinar on “Ethics in Climate Investing — Why Portfolio Alignment Is More Than Just Science”, co organised by Investment & Pensions Europe (IPE): https://www.brighttalk.com/webcast/2163/651351

How are climate alignment metrics constructed?

Recent years have brought considerable advancement in evaluating the carbon emissions associated with investment portfolios, based on (what appear to be) scientific, data-driven methodologies.

The creation of portfolio alignment metrics is effective in five stages:

1. Choosing a reference scenario and an associated remaining carbon budget. The choice of a reference scenario, e.g., 1.5°C vs. 2°C, may have dramatic budget implications: 250 GtCO₂ remaining for 1.5°C vs. 1,200 GtCO₂ for 2°C (IPCC AR6, 2023)
2. Defining how the carbon budget is to be allocated among companies. This raises questions of interregional justice (e.g., EU firms face 3x stricter budgets than emerging-market peers (4)).
3. Projecting the company’s expected carbon emissions trajectory. This can notably be done by using targets vs. historical trends.
4. Measuring company alignment as the gap between projected emissions and the allocated budget.
5. Aggregating alignment at the portfolio level.

Some of these steps can be determined on entirely or predominantly scientific grounds, and many bodies have asserted that a consistent approach should be pursued (FOEN, 2022; GFANZ, 2022a; OECD, 2022).

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. In other words, certain decisions within such frameworks cannot be standardized based on scientific principles and are unavoidably ethical in nature.

For example, when one is deciding how to project future company activity and whether that projection should be based on company targets or historical trends, one can use a data-driven process to determine an optimal or preferred approach. Other steps cannot be determined scientifically and require ethical judgements. When seeking to choose between a 1.5°C or 2°C scenario (as part of step 1), the intergenerational fairness of imposing costs on future versus present populations must be considered.

When determining the relevant scope of a company’s emissions to consider (as part of stage 2), it is necessary to reflect on whether the firm should also be held responsible for the emissions of its suppliers and the use of its products by clients. On such questions, there are no true or false answers, but rather normative choices about what is right or wrong.

Which ethics? Thinking around 3 archetypes

How, then, can ethical questions be answered in a consistent and coherent way?

The recently published article (1) presents three archetypes: a ‘principled investor,’ grounded in traditional moral philosophy such as Kant’s categorial imperative; a ‘utilitarian investor,’ who sees ethical value in maximizing monetary utility’; and a ‘harmonist investor,’ leaning on Hans Jonas’ imperative of responsibility. All three are ethical; all are different.

For example, a ‘utilitarian’ investor could easily justify the use of an economic carbon intensity metric, while a ‘harmonist’ investor would have a stronger case for using a carbon intensity metric focused on physical production (especially in key sectors).

Strategic impact

In order to illustrate the importance of this issue, the authors applied three different methodologies—associated with the three ‘archetypes’—to a diversified global equity portfolio of 1,300 developed market stocks.

All three approaches produce a 110-115% ‘overshoot’ versus a Net Zero pathway (defined as the ratio of projected portfolio excess emissions to the allocated carbon budget over a given horizon). However, the differences at the sector level are very large, particularly in the most climate-relevant industries.

For example, the Airlines sector exhibits an emissions overshoot of 162% in the ‘principled investor’ model but only 32% in the ‘utilitarian investor’ model and an extremely benign -10% figure in the ‘harmonist investor’ model. Meanwhile, we see a 91% overshoot for Steel companies in the ‘harmonist investor’ model, contrasting with a much more modest 46% overshoot in the ‘utilitarian investor’ model.

These huge differences would have very significant implications for an investor who wished to adjust the portfolio to improve alignment.

Conclusion: diversity matters, but governance is essential

For those considering how to align equity portfolio ‘emissions’ with climate-related objectives, the significant inconsistencies between different methodologies (5) are often viewed as a real-world obstacle. A uniform approach might appear desirable since it could simplify comparisons, enhance transparency and facilitate regulatory activity.

However, certain design choices cannot be determined by scientific criteria alone and inevitably involve normative judgments, with which others may well disagree. Full standardization, by this argument, becomes both less viable and less desirable.

This is not a straightforward subject. Crucial ethical foundations tend to be unspoken and, as a result, are insufficiently scrutinized. Even when we examine the issues closely, it can be hard to draw cut-and-dried connections between an ethical position and a specific decision. What is important, however, is that choices are taken consciously and that good governance is in place. This can only be achieved where investors clearly define the ethical basis of their approach. 

References

(1) A Question of Ethics? Climate Alignment in Equity Portfolios. Vincent Bouchet (August 2025) Scientific Portfolio, an EDHEC Venture - https://scientificportfolio.com/pdfs/2025-08-SP-publication-a-question-of-ethics-climate-alignment-in-equity-portfolios.pdf

(2) 85% of global developed market cap, per MSCI World constituents; MSCI, 2024

(3) Do ESG Scores and ESG Screening Tell the Same Story? Assessing their Informational Overlap (2024), Scientific Portfolio Publication - https://scientificportfolio.com/pdfs/2024-12-do-esg-scores-and-esg-screening-tell-the-same-story.pdf

ESG scores vs. ESG exclusionary screening: do they tell the same story? (2024) EDHEC Vox - https://www.edhec.edu/en/research-and-faculty/edhec-vox/esg-scores-versus-esg-exclusionary-screening-do-they-tell-the-same-story

(4) EU budget proposal: right priorities, too little ambition (July 2025) Zsolt Darvas, Bruegel - https://www.bruegel.org/first-glance/eu-budget-proposal-right-priorities-too-little-ambition

(5) ILB (2020). The Alignment Cookbook - A Technical Review of Methodologies Assessing a Portfolio’s Alignment with Low-carbon Trajectories or Temperature Goal, Institut Louis Bachelier et al. - https://climate-transparency-hub.ademe.fr/wp-content/uploads/2021/01/cookbook.pdf

Haalebos, R., & Fouret, F. (2022) Exploring ITR scores: Framing robust company-specific benchmarks and future company-level GHG emissions ranges, FTSE Russell - https://www.lseg.com/content/dam/ftse-russell/en_us/documents/research/20220713_itr_paper_final.pdf

de Franco, C., Nicolle, J., & Tran, L. A. (2023) Climate Portfolio Alignment and Temperature Scores, The Journal of Impact and ESG Investing - https://www.pm-research.com/content/pmrjesg/4/2/66

Photo by Guy Bowden via Unsplash