Investor guide to carbon footprinting

Investor guide to carbon footprinting

Within the landscape of carbon metrics, it is sometimes difficult to find the right direction. We built this compass to guide you through current and developing carbon assessment tools: What can they tell you? What do they not tell you?

What’s it all about?

Within the landscape of carbon metrics, it is sometimes difficult to find the right direction. We built this compass to guide you through current and developing carbon assessment tools: What can they tell you? What do they not tell you? What are the main methodological choices and how do they affect the end results? We explore and answer these questions in a simple and user-friendly way by looking at three types of metrics: carbon footprints, alternative and complementary measures (including green-brown share and ‘avoided emissions’) and static/forward-looking benchmarks. We also review the methodology of the main data providers on the market and detail the results of a series of workshops organised by the Institutional Investor Group on Climate Change (IIGCC).

Trending now
As more investors carry out a carbon footprint of their investments, encouraged by initiatives such as the Montreal Pledge and the Portfolio Decarbonisation Coalition, as well as growing regulatory pressure in certain countries like France, there are still a number of unresolved questions (see our ten burning questions).

Multiple metrics
There is growing consensus that carbon footprints are not enough and need to be complemented by other metrics that better reflect the forward-looking and multi-faceted nature of the climate change challenge. Carbon footprinting may be adequate to understand and communicate the contribution of investments to climate change, but other metrics are needed to: 1) understand the positive contribution of certain investments to the climate and energy transition as well as 2) the risk associated with certain investments in the medium to long run.

Focus on the use case
In turn, we explore carbon footprints, alternative and complementary metrics such as ‘green-brown’ share and ‘avoided emissions’, and benchmarks, both static and forward-looking. Which metric is the most appropriate? We argue that each has pros and cons and ultimately it depends on the aim of the analysis.

Carbon metrics: key dynamics
A growing number of investors are calculating and disclosing the carbon footprint of their portfolios, with a greater level of transparency on methodology shortcomings, data providers, and more interestingly, evolution over time. According to a 2015 Novethic survey, 94 investors have done a carbon footprint, and the number is increasing (+68% February - July 2015).
What is driving these figures? This happens in a context where regulatory and stakeholder pressures are increasing, through initiatives like the Portfolio Decarbonisation Coalition, the Montreal Protocol, and the French law on Energy Transition driving action. The Investor Platform for Climate Action provides details on 17 initiatives undertaken by over 400 investors in 30 countries.

We are observing three main dynamics in this field:
1. There is a growing recognition that additional metrics need to complement carbon footprints in order to help understand what is driving results, assess the positive contribution and alignment with transition scenarios, and in that perspective add a forward-looking element to the analysis.
2. The use case is an important determinant in choosing what metric is appropriate – ‘climate-friendliness’ and ‘climate risks’ are two separate objectives and different metrics are more suited for one or the other.
3. Carbon footprint results, as well as other carbon metrics, are not yet fully comparable due to different methodologies. This raises the question of standardisation.




Carbon footprint: the beginning of a journey
Efforts on reporting at portfolio level have overwhelmingly revolved around carbon footprinting on listed equity, as they benefit from:
1. The broadest coverage among reporting companies, fuelled by progress made through several initiatives such as the CDP or the GHG Protocol.
2. The fact that it can be leveraged across responsible investment strategies, and for instance be perceived as an (imperfect) proxy to broader environmental risk management and the assessment of a portfolio contribution to climate change.

If you only have five minutes
Mainly a measure of responsibility…
Carbon footprint is arguably the most widely-used, simple and high-level metric in this field. It can be understood as a measure of “climate-friendliness”, or contribution to climate change, still recognising a number of caveats that we explore in the following sections (e.g. inclusion of products and service emissions).

…that might be used as a starting point to assess exposure to low-carbon transition risk...
Carbon intensity may be a starting point to assess exposure, in particular exposure to carbon risks (e.g. regulatory risks) through investments in carbon-intensive assets, depending on the choice of metric and if embedded into broader risk assessment frameworks that take other factors into account. Its relevance to inform exposure to climate risk (e.g. physical risks from extreme weather events) is however completely different as a carbon-intensive asset is not necessarily exposed to climate-related events such as drought or floods compared to a low-carbon one.

… and soon to become mandatory reporting
It is interesting to note the wording of the French Law. Point 2 requires investors to provide information on “Climate-related financial risks” (here understood as both carbon and climate risk) and point 3 calls for disclosing “Associated greenhouse gas emissions”, thus leading to believe that carbon footprint is an integral component of risk assessment. The Montreal Pledge also takes this view.

While simpler metrics may “do the job”…
Carbon footprinting may not be necessary for a high-level, broad-based understanding of contribution and/or exposure. An assessment of the proportion invested in ‘brown’, or high-carbon sectors, could be sufficient for a simple estimation of the overall negative portfolio contribution to climate change.

… carbon footprinting is a widely-used measure at company level…
Companies have been reporting on their carbon footprint for a few years now, fuelled by reporting initiatives such as the CDP and the GHG Protocol. The next step is to transpose this concept at portfolio level by using the ownership logic. This transposition is relatively recent, with several still-unresolved technical questions.

… with many unresolved methodological questions
Questions include: should I include Scope 3? Should I care about double counting? What are the methods to estimate carbon data in the absence of reporting? How should I aggregate the data at portfolio level and what metrics should I use? What about the weighted average carbon intensity metric? We argue that there are no yes or no answers to these questions, as it depends on the use case, i.e. how the results will be used. We detail this in the next section.

It’s just a start!
While imperfect, the results are useful to get a point-in-time picture of the portfolio contribution to climate change. A consensus is emerging on the fact that this metric needs to be used together with other methodologies, in order to develop a more holistic understanding of the underlying contribution but also exposure to risk. In particular, carbon footprint only measures the negative contribution of a portfolio to climate change, and ignores the potential positive contribution to the energy and climate change transition. Carbon footprints are also backward-looking.


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