Pathways Versus Incentives: Climate Activism to Climate Aligned Portfolio Management

Climate activists have pressured financial institutions to accelerate global decarbonization by aligning portfolios with Paris Agreement transition pathways and targets. We trace the progression from the Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA) scenarios to corporate target setting via the Science-Based Targets Initiative (SBTi) and financial institutions’ portfolio alignment methods. We identify three critical weaknesses that will limit efficacy: the absence of rigorous GHG emissions accounting, reliance on centrally planned pathways, and tension with fiduciary duties. These issues undermine the theory of change behind activist and financial sector efforts. As an alternative, we propose Emissions Liability Management (ELM) which treats emissions as liabilities matched by removal assets, directing firms to maintain emissions solvency. Rather than chasing pathways, ELM provides incentives for emissions reductions and removals consistent with shareholder obligations derived from market prices. By reframing climate action in financial terms, ELM can engage financial markets as agents of change in a manner grounded in sound economics.