Back in 2016, S&P Global Ratings issued a report warning that banks could face credit rating downgrades if they failed to address risks associated with climate change.1 If a bank’s business activities were concentrated in an area that could be marred by climate change, the report said, this could weaken its business position and put its creditworthiness under pressure. As environmental, social, and governance (ESG) issues continue to gain the attention of investors and other stakeholders around the world, the warning is even more relevant today.
This global investment and commercial bank is one of the larger financers of fossil fuels around the world. In response to the Paris Agreement, the bank committed to attain the goal of net-zero by 2050 and needed to develop a strategy to make that happen. The enterprise risk, sustainability, and quantitative analysis teams were tasked with the first step in this journey — understand the bank’s current level of financed emissions in its investment portfolio.
Pain Points
Carbon footprinting is a typical starting point for assessing the greenhouse gas (GHG) emissions associated with a portfolio, as it offers a baseline from which to mitigate risks. Carbon intensity (CI) is a measure that scales GHG emissions by company revenue to facilitate comparisons of emissions across entities of different sizes. Companies with lower CI values generate fewer tons of GHG emissions per $1 million USD of revenue than those with higher CI values. The teams lacked this data to quantify financed emissions in a way that was both meaningful and actionable and needed information to:
- Review all the securities in the portfolio and determine the Scope 1, 2, and 3 emissions for each company in tons of CO2 per year.
- Determine carbon emissions for small-and medium-sized enterprises (SMEs) that don’t disclose this information.
- Assess the bank’s ownership of each company based on the value of holdings in the portfolio as a percentage of the company’s market capitalization.
- Link environmental data to the company’s customer base.
Team members also wanted to easily access data via a desktop solution, plus an efficient data feed option. They began discussions with S&P Global Market Intelligence (“Market Intelligence”) to learn more about the firm’s offering.
The bank was committed to attaining the net-zero goal laid out by the Paris Agreement and needed to understand its current carbon footprint as a starting point.
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The Solution
Market Intelligence discussed a wide range of capabilities that included data from S&P Global Trucost, a sister division that assesses risks relating to climate change, natural resource constraints, and broader ESG factors. These capabilities would give the teams the ability to:
Evaluate the carbon footprint of the portfolio
S&P Global Trucost Environmental Data contains information on over 16,000 companies,2 covering Scope 1, 2, and 3 with metrics on quantities and intensities of carbon-equivalent emissions (tCO2e, tCO2e/US$ revenues) and their estimated damage cost equivalents (US$), along with impact ratios. It includes sector revenue data that gives revenues and percentages of company revenues derived from each of 464 business sectors. Data goes back to 2005, where available.
Estimate carbon data when not reported
Private Company Data covers 16 million private companies around the globe, 10 million private with financial statements, and 500,000+ early stage companies supported by data from Crunchbase. With this in hand, users can compare private companies against similar ones that are publicly available to estimate emissions.
Bring in company financials
S&P Capital IQ Premium Financials provides standardized data for over 5,000 financial, supplemental, and industry-specific data items for over 150,000 companies globally, including over 95,000 active and inactive companies across multiple industries. Data is available at numerous frequencies and point-in-time representations of a financial period include press releases, original filings, and restatements.
Access data as needed
A desktop solution for quick access would be available alongside XpressfeedTM that automates the download and management of Market Intelligence data. Xpressfeed enables delivery as needed in a ready-to-query relational database to link to internal applications.
Easily manage integration with internal data
Company Relationships is a global database of all relationships that exist between companies in the S&P Capital IQ universe. It can be used to build a corporate family tree to determine the ultimate parent of a company.
Global Instruments Cross Reference Service enables users to easily link a security to its ISIN, CUSIP/CINS, and more to understand which securities are issued by the same firms.3
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Key Benefits
Members of the enterprise risk, sustainability, and quantitative analysis teams were impressed with the depth of the Trucost environmental data and the ability to link it to financial details and other capabilities offered through Market Intelligence. This would enable team members to multiply their ownership percentage by the relevant carbon emissions for a company and sum all companies to create the overall carbon footprint of the portfolio. This would serve as the baseline from which to measure improvements over time. In particular, the teams saw value in having:
- A comprehensive environmental data set with many links already in place to core line items of interest to the bank.
- Renowned financial data that has been adjusted for nonrecurring charges to enhance cross-company comparability and that can be easily traced back to the source documents.
- The ability to estimate carbon intensity for non-reporting firms using private company data that has been standardized to facilitate comparisons with both public and private firms.
- Improved workflows with easy integration of data with internal applications using a powerful data feed solution and cross-referencing capabilities.
The teams subscribed to the solutions to set up their net-zero roadmap. They will eventually use the information in internal credit risk models and as a guideline for the business as it helps with the transition to a green economy.
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1“S&P: Banks that ignore climate risk face credit downgrade,” S&P Global Ratings, June 5, 2016, www.climatechangenews.com/2016/05/06/sp-banks-that-ignore-climate-risk-face-credit-downgrade/. Credit ratings are prepared by S&P Global Ratings, which is analytically and editorially independent from any other analytical group at S&P Global.
2All data as of February 2021.
3ISIN=International Securities Identification Number; GICS=Global Industry Classification Standard.