The Transition Pathway Initiative: a faith-based framework for climate-conscious investing

As faith-based investors deal with the moral imperative to address climate change, many have chosen to completely divest from fossil fuel companies. While this approach may be decisive, it does present a complex dilemma for investors who believe a transition to a low-carbon economy requires engagement with both energy producers along with major energy consumers.

The Transition Pathway Initiative (TPI) offers a practical alternative that aligns with faith-based values while acknowledging the economic reality that fossil fuels will remain part of our lives for some time to come.

Born from faith-based leadership

The TPI owes its origins to faith-based investing. Under the leadership of the Church of England's National Investing Bodies, TPI launched in 2017. This initiative exemplifies how religious organisations can drive positive change in the investment world.

TPI’s heritage is particularly relevant for faith-based investors seeking to align their portfolios with both their values and the urgent need for climate action. I have been exposed to the work of the TPI from its inception through my prior role at Wespath and I have been impressed with its comprehensive assessments of companies’ transition readiness.

Understanding the TPI framework

The TPI is a complex framework that evaluates how companies are preparing for the transition to a low-carbon economy. It has identified six levels of awareness and action that help investors assess where companies stand in their climate journey. It has classified over 2,000 companies using the following framework:

Level 0 - Unaware: Companies show no evidence of acknowledging climate change as a business issue.

Level 1 - Awareness: Companies acknowledge climate change as a business risk/opportunity.

Level 2 - Building Capacity: Companies develop explicit policies and commit to climate action.

Level 3 - Integrated into Operational Decision Making: Companies integrate climate considerations into operational decisions.

Level 4 - Strategic Assessment: Companies integrate climate change into strategic planning.

Level 5 – Transition Planning and implementation: Companies demonstrate sophisticated strategic assessment and planning.

In addition, it has assessed 30 corporate bond issuers by the market value of issued debt in the electricity and oil & gas sectors. It has developed an investor-led pilot framework of indicators to assess the preparedness of banks for the low-carbon transition and has developed an investor-led framework of indicators to assess how countries are managing the low-carbon transition and the impacts of climate change.

Beyond divestment: a strategic approach

While faith-based investors that have elected to divest are communicating a moral imperative regarding the current climate crisis, the TPI framework helps investors maintain strategic positions while actively promoting corporate climate responsibility.

This approach recognises that the transition to a low-carbon economy requires that companies in all sectors transform their business models, not just energy producers. Major energy consumers in industries such as manufacturing, transportation, and technology must also adapt their business models to incorporate renewable energy sources.

The TPI's methodology provides investors with data to evaluate companies’ current climate management practices and assess future carbon performance against international targets. This will enable investors to make more informed decisions about portfolio inclusion while helping to guide constructive engagement with company management.

A call to action for faith-based investors

Faith-based investors are uniquely positioned to influence corporate behavior through their investment decisions and engagement activities. By adopting the TPI framework into their investment process, they should seriously consider implementing the following practical applications:

• Work with asset managers to integrate TPI assessments into portfolio construction

• Engage with companies to improve their TPI ratings

• Set minimum TPI level requirements for portfolio inclusion

• Monitor and report on portfolio companies' transition progress

• Collaborate with other investors to amplify their influence

The TPI offers an alternative approach between full divestment and passive acceptance of the status quo. It acknowledges that while fossil fuel companies and major energy consumers must transform their business models, immediate and complete divestment may not be the most effective way to facilitate this transition.

Looking forward

As many investors seek to take steps to move toward a low-carbon future, the TPI provides faith-based investors with a practical approach to align their portfolios with this transition. The initiative's faith-based origins, combined with its rigorous methodology, make it particularly suitable for religious organisations seeking to exercise their investment influence responsibly.

For faith organisations considering referencing the TPI, FaithInvest can help: Contact us at info@faithinvest.org.