The quality and quantity of information on companies’ carbon footprints needs to improve rapidly to help institutional investors make more informed investment decisions, experts claim.
At first glance, it may seem the amount of information on environmental, social and governance matters has dramatically increased over the past 20 years.
However, the avalanche of information, especially on environment-related issues, is often met with scepticism and allegations of greenwashing.
“There is no question that with regulatory pressures and demand from investors and consumers, the quantity of carbon reporting will exponentially increase,” notes Dr Pooja Khosla, vice-president at Entelligent, a risk analytics company focusing on climate change.
Just as companies, businesses and many individuals are embarking on a journey or path to net zero, so too are governments. Policies and frameworks for both action and reporting, for example on or of carbon footprints, are also themselves in a process of transition
Stephan Breban, Renewity
However, Khosla adds: “There is still a long way to go to in terms of quality and standardisation. We will definitely see more reports within this decade, but the question is how meaningfully these will relate to ‘purpose’.”
As ever, time is of the essence. The phrase ‘climate emergency’ may sound melodramatic, but the green lobby says there is no time to wait for perfect data on carbon issues to become available.
“There may not be a concept of ‘perfect’ carbon data, but there certainly is a surplus of information, perspectives and alternative measurements available to investment companies towards starting a drive towards climate goals,” says Khosla.
“It is time for investment companies to actively employ these metrics, instead of becoming data slaves,” she adds.
Most people will agree that there has been more collation of data than implementation, but progress, however overdue, is being made.
Many strategists say that even as recently as 10 years ago, ESG was not at the forefront of pension managers’ thinking. For many in the industry, the latter half of the 2010s saw a major change.
“Implementing a broad ESG tilt into a major defined contribution scheme as an early mover just four years ago was a challenging and lengthy process,” argues Julius Pursaill, scheme strategist at workplace pensions provider Cushon.
Among the issues to have emerged is double counting; this is when a single greenhouse gas emission, reduction or removal, achieved through a mechanism issuing units, is counted more than once. This can be when both the buyer and the seller of a carbon credit count the reduction.
Pursaill says: “Assessment of carbon footprints and net-zero commitments are features of only the last couple of years.
“The last year has seen an increasing focus on how to measure carbon footprints, how to deal with problems of double counting and whether a 2050 net-zero commitment is adequate.”
Recent events have helped to show that pensions companies are taking action, which should see increased focus on data quality.
Last year, Scottish Widows, one of the biggest pension providers in the UK, said it would divest at least £440m from companies that have failed to meet its ESG standards, and warned this figure could grow much further if businesses do not take action to improve the sustainability of their business practices.
Scottish Widows’ exclusions policy targets include companies that derive more than 10 per cent of their revenue from thermal coal and tar sands.
Pace of change needs improvement
Despite such actions, Stephan Breban, head of research at Renewity, a renewable-energy, multi-manager specialist, stresses that the pace of change needs to pick up.
He says: “Far more needs to be done to more quickly move away from hydrocarbon-based power.
“Just as companies, businesses and many individuals are embarking on a journey or path to net zero, so too are governments. Policies and frameworks for both action and reporting, for example on or of carbon footprints, are also themselves in a process of transition.”
One other factor that may help the drive to reduce emissions is more government action, since it might help align profitability with acceptable environmental behaviour.
Companies that do not do the right thing should be taxed out of existence, says the green lobby. Certain activities could simply be made illegal, but such measures would not eliminate the need for better measurement of carbon footprints.
Many industry players say better measurement will be a catalyst for further action, as well as helping to vindicate steps that have already been taken such as Scottish Widows’ exclusions.
“Measuring is the starting point, without which the necessary impacting actions of mitigation and management will not follow; it’s the crucial first step, but not without challenges for funds in deciding on metrics/depth and purpose,” notes Breban.
“Reporting brings the reality into public view. We would argue that if you’re afraid to report it then there is probably something to be ashamed of,” he adds.
The proof is in the numbers
The average UK pension pot finances 23 tonnes of CO2e a year, according to Cushon, adding that its Net Zero Now product has reduced that impact significantly.
Cushon spells out specific details it regards as important. “We can only provide a Net Zero Now product armed with the knowledge and data about what we are financing,” says Pursaill.
He adds: “The current carbon footprint of our investment portfolios is core to Cushon’s strategy. Cushon has good data on scope 1 (direct) and 2 (indirect) emissions across our listed equity and bond portfolios.
“Accurate data on scope 3 emissions, which compensates for double counting, both within the portfolio and across the market, is currently more difficult, but Cushon sees methodologies and data continuing to improve.”
He notes that Cushon will also measure avoided emissions — while not counting them towards any net zero targets — and negative emissions delivered through carbon sequestration.
“These will be particularly significant in our private markets portfolio. Our trustees are currently debating which targets they wish to set under Task Force on Climate-Related Financial Disclosure requirements.”
ESG and financial returns: Schemes can have their cake and eat it too
Schemes are increasing their investments in sustainable thematic strategies, which allows trustees to keep their fiduciary duty of targeting returns while ‘doing good’.
Consistency of reporting is also important, so managers are comparing like with like.
This will include standardisation across different sectors and geographies, which may sometimes be difficult. Khosla says investment portfolios need “solutions that are both vertical and horizontal”.
She adds: “The ‘vertical’ solution will help include and empower portfolios that invest in climate leaders across asset classes, regions, and sectors. The ‘horizontal’ solution will create equity and consistency across sectors and regions.”
