Investors should consider a dashboard of portfolio carbon emissions metrics over a single measure when monitoring their carbon exposure, a recent report by LSEG has recommended.
The report – Decarbonisation in portfolio benchmarks: Tracking portfolio carbon transition – was written in partnership with the Net Zero Asset Owner Alliance (NZAOA), and tracked the cause of changes in emissions and highlights how investors can effectively measure and track portfolio decarbonisation over time.
It found individual carbon metrics are regularly impacted by idiosyncratic biases and short-term volatility. This means that when recorded in isolation, the data can be difficult or misleading. As a result, LSEG recommended viewing portfolio decarbonisation through a multi-variable lens, such as focusing on multi-year trends over year-on-year fluctuations.
The report also revealed this short-term volatility is driven by non-carbon factors, such as constituent churn, sector rotations or changes or adjustments to normalisation factors. These factors have big influence on changes in company emissions disclosures, where in the last year, changes in normalisation factors contributed to a 10% change in top line carbon intensity.
Further, the report also reiterated Scope 3 data is “still relatively immature and using it for financial decision-making remains challenging.” It’s immaturity makes it challenging to consistently track value-chain emissions on a portfolio basis. However, it suggested that systematically disregarding company disclosures that omit the most material Scope 3 categories for their sector can reduce volatility by almost 50%. Overall, this improve the stability and accuracy of Scope 3 data for portfolios and informs better estimates for non-disclosing companies.
Since the Paris Agreement, key financial benchmarks are decarbonising on an intensity basis, the report also found, as it said between 2016 and 2022, the weighted average carbon intensity of the FTSE All-World equity index declined by 4.1% annually on a revenue basis (WACI) and 5.1% on an ownership basis (EVIC). Similar rates were seen in fixed income, with the FTSE WorldBIG Corp index decarbonising at 3.9% (WACI) or 1.4% (EVIC) over the same time frame.
Dr.Udo Riese, head of sustainable investing at Allianz SE, and Jean-Francois Coppenolle, sustainable investment director at Abeille Assurances, who are also both co-lead monitoring, reporting and verification track, wrote: “The report underscores the critical importance of understanding the root cause of changes in emissions. By disaggregating these into their respective drivers and factors and by conducting analysis using a variety of methodologies, such as year-on-year versus long-term trends, it becomes possible to more accurately interpret emissions profiles and their respective changes.
“It is encouraging to note the increasing number of new Scope 1 and 2 corporate reporters, particularly in emerging markets. At a benchmark level, 90% of the equity benchmark by index weight and 85% of the equivalent corporate fixed income universe now disclose their Scope 1 & 2. While Scope 3 disclosure remains more limited, it is gradually improving.”
