By Søren Rahbek, Director | ESG Specialist | The 27th of January 2023
Financial Market Participants, regulators and the press currently have a strong focus on greenwashing and on following up on ambitious targets made over the past year. The efforts might be thwarted by a simultaneous increased focus on expanding reporting of CO2 emissions as a shift in the data obscures any progressive actions taken.
CMP sees significant changes in reported CO2 emissions and caution regulators and the press not to jump to conclusions. We expand on this in the text below.
Last year many Financial Market Participants (FMPs) chose to publish CO2 data on their investments. Indeed, the Danish Financial Business Association, Finance Denmark (FIDA) had issued a recommendation that all FMPs should issue a report on their financed CO2 emissions according to standard models. The standard is well aligned with the relevant SFDR PAI definitions and obviously put everybody under a mild pressure to get started on the reporting of this important PAI.
The reporting last year created a lot of interesting discussions – and frustrations – on data, calculations, reports etc. There was a strong positive impact in that the discussion got started and awareness increased. However, all FMPs experienced difficulties in sourcing relevant and believable data, and also had to overcome a bias toward wanting a degree of precision which was not yet available.
Given the lack of experiences with these data, some variation over time and between market data suppliers had to be expected. It is still very early days.
The press obviously looked for evidence of greenwashing and questioned the general lack of specific targets. The reply was most often that data simply did not yet support making strong commitments to specific target reductions.
Now it is time for the second reporting and surely data has improved…? The short answer is luckily affirmative, however new problems arise.
Many market participants follow an ambition to be aligned with the Carbon Footprint PAI defined by SFDR, as the sum of the so-called Scope 1, Scope 2 and Scope 3 emissions, divided by the Enterprise Value including Cash. Importantly, the FIDA model recommends using Scope 1 and 2 – but adds that Scope 3 can be included as a supplement where available and where relevant.
Also, many modern-minded companies would like to report on the full environmental impact of their production and make great efforts to collect and report data.
Last year, not many issuers had a realistic reporting of Scope 3 emissions and those which will now report their Carbon Footprint including Scope 3 will see a potentially very significant change in the Footprint.
CMP has done some analyses into both the initial fund data available in the European ESG Template (EET) and on some specific equities.
The new level for Carbon Footprint for the funds, which report in the EET format is a factor 2-17 larger than what was reported last year. And Coverage, which describe the number of investments where data is available, drops significantly, by up to 50%.
The Impact of Scope 3
For a single equity, such as the Danish cement factory construction company, FLSmidth, the impact of including Scope 3, which in their case is the CO2 emissions of cement factories around the world, is an increase of their CO2 footprint by a factor 9.000 (!).
For an investment manager who is conscious about the CO2 impact of the investments, it must be tempting to avoid any discussion of why the impact of the portfolio has deteriorated this much by excluding the equity. However, nothing has changed, indeed FLS might have improved their performance – but the data just shifted base.
It is thus important for market participants, including management, to be aware of the impact and not jump to unfair conclusions. It would also be preferable that the industry speak with one voice on this, when contacted by the press.
The challenge is that the real explanation is hard to give (as the above is likely to be amble proof of) and even harder to understand.
So, both companies and fund managers with ambitions of being good and green will instead likely experience the “disadvantages of being the pioneer”.
The concluding recommendation is to take any reports on the development of financed CO2 emissions with a pinch of salt and to take the time to dig into the underlying data. CMP is of course available to help with the necessary analysis and reporting.
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