Carbon Reduction in Investment Portfolios Held Back by Poor Data Availability

Supported by Impax Asset Management


In March, the San Francisco Employees’ Retirement System embraced a plan for its entire investment portfolio to achieve net-zero carbon emissions by 2050. A few weeks earlier, the University of Toronto Asset Management outlined its own goal of reducing the carbon emissions of its pension and endowment investment portfolios by 40% by 2030.

With these announcements, San Francisco and Toronto joined a growing list of institutional investors that want to sharply cut their portfolio’s carbon emissions. These investors have numerous methods to reach those goals, including divesting from high-carbon-emitting companies, investing in carbon-neutral companies, and shareholder engagement to get portfolio companies to reduce their own emissions.

But no matter what lever is pulled, institutional investors need to first know the emissions of the companies they invest in. And they can’t do that without data.

There’s the rub. The data just isn’t always sufficient.

A new Ceres profile of Wespath details the challenges. “Inadequate and inconsistent corporate disclosure” of carbon emissions and other ESG data makes it tough for investors like Wespath “and its external managers to assess and manage climate-related risks and opportunities,” the profile says.

While gathering data from publicly traded companies about their carbon emissions is easier than it used to be, there are still many gaps and shortcomings. Closing those gaps could spark even greater adoption of carbon-reduction targets by institutional investors, which in turn could encourage even greater emissions data disclosure — a virtuous cycle that will go a long way toward helping the world meet the goals of the Paris agreement.

An increasing number of publicly traded companies are voluntarily disclosing data about their carbon emission data today, Impax Asset Management notes in a recent environmental impact report. While the data quality varies, the number of companies making those disclosures is on the rise.

That number needs to continue to climb and reach critical mass, practitioners say. “I hope it happens soon,” says Ken Locklin, senior portfolio advisory and US policy analyst at Impax. “We need this information, and we need to act on it. We needed to act on it 20 years ago.”

A growing number of big investors are already acting on it. The New York State Common Retirement Fund, Sweden’s AP3, Canada’s Caisse de dépôt et placement du Québec or CDPQ, and Singapore’s Temasek are among the marquee names that have set various carbon reductions targets for their investment portfolios.

The University of Toronto Asset Management says in its 2019 Carbon Footprint Report that it will “deploy a variety of tools” to reduce its portfolio emissions by 40% over the next decade. Those tools include moving investment dollars to “lower-emitting countries and sectors” and “investing in managers and strategies that have lower carbon footprints.” The firm will also use shareholder engagement, as UTAM says it will encourage its portfolio companies to reduce their emissions “and advocate with policy-makers and regulators to take action on climate change.”

CDPQ’s goals include reducing its portolio’s carbon intensity 25% by 2025, and significantly increasing low-carbon investments like renewables and efficient buildings, according to a profile of the pension that Ceres published this month. To calculate its carbon intensity, the pension gets carbon emissions data from S&P’s Trucost. But that only involves Scope 1 and 2 emissions, which is what it’s basing its carbon reduction targets on.

The fact that CDPQ isn’t using the much-farther-reaching Scope 3 as a data point for its emissions reduction target is telling, and what it tells is this: while carbon emissions data is better than it used to be, there’s a lot of room left for further improvement.

It’s not for lack of trying by the industry. “There’s been a lot of shareholder proposals to get companies to report their emissions, and to issue climate reports or sustainability reports,” says Chris Davis, senior director of the Ceres Investor Network on Climate Risk and Sustainability. “BlackRock and other big investors have been pushing this in their corporate engagements,” he adds, with many asset owners urging companies to follow the standards set out by the Task Force on Climate-related Financial Disclosures. “The data is improving and becoming more decision-useful,” Davis says.

Indeed, there’s no doubt that data reporting and availability has improved. As Impax’s Locklin notes, “We used to do our all our own environmental data analytics by literally reading local newspapers — to find out what a company in, say, Thailand was doing that had environmental impacts.”

Now, he adds, “That information is mostly available on a Bloomberg terminal.” And there are a host of other data providers, including MSCI, Sustainalyics and Trucost, that give investors a range of data points on corporations’ carbon emissions and other ESG factors.

However, the whole exercise of measuring a portfolio’s carbon emissions is “only as good as the data,” Davis says. And it’s not always good, with significant gaps remaining in many areas.

It is “relatively easy” to get emissions data for listed equities from developed markets, especially for Scope 1 and Scope 2 emissions, Davis says. Like CDPQ, many investors don’t even bother trying to analyze Scope 3 emissions, “because the data is poor and spotty,” he adds. “Companies typically don’t have a strong handle or voluntarily report the emissions from their global supply chains, or the emissions that come from the use of their products.”

It’s also challenging when you look beyond traditional, developed-market equities. For small- and even mid-cap stocks, and especially for emerging markets securities, “the availability and quality and consistency of the data falls off,” Daivs says. The same goes for many alternative investments.

Still, getting data on all of these investments is better than it used to be, and continuous improvement is evident, spurred on by investor demand. There’s even increased demand from a small subset of sophisticated investors “for data on the net carbon emissions of their products in use,” Locklin says.

This is the “next stage past carbon footprinting, and it’s still early days,” he says. Data providers like Carbon Delta and Four Twenty Seven are looking to provide this information to asset managers and investors. “There are different approaches between those firms, but each does credible work,” Locklin says. “They are working to measure and model the real carbon intensity of investments in a portfolio.”

Both of those companies were acquired last year, Carbon Delta by MSCI and Four Twenty Seven by Moody’s. The acquisitions are further evidence of the increasing desire by investors and asset managers for a wide range of climate-focused data.

Looking ahead, experts see increased pressure on companies to disclose more data on their carbon emissions and carbon intensity — pressure that will come from institutional investors, the TCFD, and eventually from securities market regulators who will one day mandate such disclosures. In fact, regulatory attention could “greatly accelerate” disclosure and thus the ability of investors to measure and reduce the carbon emissions of their investment portfolios, Locklin says.

The need for improved disclosure is clear to progressive investors like Wespath. If corporations would report in line with frameworks provided by groups like TCFD and the Sustainability Accounting Standards Board, it would “facilitate improved decision-useful climate risk assessments and scenario analyses,” Wespath believes, according to the Ceres profile.

Other investors get this as well. “We will continue to encourage companies to provide greater levels of transparency and to describe more clearly and comprehensively their approach to climate-related issues,” the University of Toronto Asset Management says in the report detailing its 40% carbon reduction target. “Disclosing GHG emissions data is an important part of this process.”

Attitudes like this have some experts feeling optimistic. “I am encouraged by the progress,” Locklin says. Keeping that progress moving forward will depend on investors like Wespath, the University of Toronto and others keeping up the call for improved data disclosure from corporations.

“The most important shift is from investor interests,” Locklin says. “That really is key.”

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