More and more investors are beginning to take stock of their role in the low-carbon transition and, with that, have called upon data providers to supply emissions data on portfolio constituents. However, with the increasing concern over portfolio emissions, the reliability of the carbon data used to analyze an investor’s portfolio is being called into question. A recent article appearing in the Financial Times* cited a study by MSCI, which compared emissions estimates for companies lacking emissions data leading up to 2015 with reported emissions published by those same companies for the first time in 2015. The study found that three-quarters of modelled emissions were overestimated by 50 per cent or more! This can lead investors to overstate the carbon output of their portfolio.
Luckily, Carbone 4’s methodology for analyzing the carbon impact of investment portfolios- baptized Carbon Impact Analytics- was specifically engineered to eliminate the risk of data discrepancy through a number of design criteria.
Carbon Impact Analytics (CIA) privileges a bottom-up approach to portfolio analysis. Rather than relying on top-town models which allocate emissions based on statistical models (often leading to inaccuracies), Carbone 4 systematically recalculates the direct and indirect emissions of portfolio constituents. CIA relies on a series of calculation modules fed by operational data widely available in companies’ annual reports. Key inputs include the geographical locations of a company’s operations and production volumes by specific product type, allowing for precise emissions estimates.
An increasing number of companies report their own emissions. However, estimation methods vary and have led to criticism over the use of this reported data. For companies who already report Scope 1 and 2 emissions, Carbon Impact Analytics serves as a consistency test. More importantly, CIA provides a consistent approach to estimating scope 3 and avoided emissions, for which no standardized approach is currently applied across companies. What’s more, with the understanding that the carbon footprint isn’t the only indicator for actively managed funds, CIA also features a qualitative forward-looking evaluation of company strategy and investments. This more comprehensive set of indicators allows for the calculation of an overall rating, without which the full measure of carbon-related risk cannot be determined.
So why haven’t all carbon data providers adopted a similar bottom-up approach? Well, a bottom-up approach like CIA can be more time consuming (collection and treatment of operational data) and requires extensive expertise in carbon assessment of companies. Few other companies have this kind of experience under their belt: Carbone 4 has been calculating, cataloguing, and updating an extensive base of emissions factors since 2007, spanning all sectors of activity.
Carbone 4’s innovative approach to assessing the carbon impact of investment portfolios not only allows investors to gain a comprehensive yet precise vision of their carbon impact, but also to inform asset allocation and design low carbon indices.
For more information on Carbon Impact Analytics and Carbone 4’s approach to building low carbon indices, check out our latest report “Designing low carbon indices based on Carbon Impact Analytics indicators.”