The Net Zero Asset Managers initiative is an international group of asset managers committed to supporting the goal of net zero greenhouse gas (GHG) emissions by 2050 or sooner, in line with global efforts to limit warming to 1.50C. 1 To date, there are 128 signatories and $43 trillion U.S. in assets under management. Recently, the peak body for the $3.3 trillion superannuation industry in Australia warned that a failure to set similar targets could cost billions of dollars in retirement savings as financial risks from climate change continue to mount.2
This Australian superannuation fund is committed to investing in firms with good ESG management and has established a net zero target for 2050. The ESG team is charged with devising action plans to reach this target and needed access to comprehensive data to better understand the current carbon footprint of its portfolios and how best to allocate assets over time to help avoid climate risks and achieve strong long-term returns.
Pain Points
Members of the ESG team lacked the extensive data they needed to truly understand the carbon footprint of their portfolios, as well as the potential risks to investments given climate change. They wanted to identify third-party capabilities that would enable them to:
- Create a carbon footprint benchmark from which to measure progress being made on the journey to net zero. Evaluate potential earnings at risk from transition costs associated with any government policies that could increase the price of carbon. Identify possible physical risks that could impact investments should there be heatwaves, droughts, floods, or other natural disasters where assets are located. Track the portfolios against the goals of the Paris Agreement to assess company- and portfolio-level alignment and changes in carbon footprints over time.
The team contacted S&P Global Sustainable1 ("Sustainable1") to learn more about the group’s offering.
Getting to net zero requires a detailed inderstanding of underlying sources of carbon emissions, as well as forward-looking metrics on physical and transition risks. The ESG team at this super fund needed additional data and analytical tools to chart a realisttic path to reach its net zero targets by 2050.
The Solution
Sustainable1 represents S&P Global's integrated sustainability offerings. This includes Trucost, the data and analytics engine that powers many of S&P Global’s ESG solutions. Sustainable 1 discussed numerous capabilities that would enable the ESG team at the super fund to:
Evaluate the carbon intensity of its portfolios
Trucost Carbon Emissions Dataset contains information on over 22,000 companies,3 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 contains 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.
Assess the ability of companies to absorb future carbon prices
Trucost Carbon Earnings at Risk Dataset can be used to stress test a company’s current ability to absorb future carbon prices and understand potential earnings at risk from carbon pricing at a portfolio level. Integral to this analysis is the calculation of the Unpriced Carbon Cost, which is defined as the difference between what a company pays for carbon today and what it may pay at a given future date based on its sector, operations, and a given policy price scenario.
Delve into asset-level details to assess physical risks
Trucost Physical Risk Analytics offers an asset-level approach to the assessment of physical risk at the company and portfolio level. This include data that provides detailed information to help understand the exposure of company-owned facilities and capital assets to seven climate-related physical impacts (i.e., flood, water stress, heatwave, cold wave, hurricanes, sea level rise, and wildfire) under different climate change scenarios. Scores at an asset basis can then be aggregated to a company level.
Track a company's progress on meeting goals of the Paris Agreement
Trucost Paris Alignment Dataset assesses company-level alignment with the Paris Agreement goal enabling investors to track their portfolios and benchmarks against the goal of limiting global warming to 1.5°C and 2°C climate change scenarios.
Key Benefits
Members of the ESG team thought this comprehensive solution set would enable them to do the necessary deep dives on portfolio companies to align investments appropriately over time to help meet the net zero targets. The team members subscribed to all the components, saying they valued having access to:
- Seasoned ESG professionals to answer questions and discuss different findings.
- One source of comprehensive and standardized environmental information, plus a well-tested methodology to estimate the carbon intensity of non-reporting firms.
- An analysis of potential transition risks as government policies are introduced to encourage companies to move to a greener economy.
- Highly-detailed geolocation information to assess physical risks from acute hazards, such as more frequent and extreme weather events, or the chronic and longer-term effects of climate change, such as sea level rise.
- An evaluation of how portfolio companies are aligned with the Paris Agreement to track progress being made over time.
This data-driven analysis based on information and tools developed by a well-recognized player in the sustainability field would also provide credibility as the fund reported on its ESG stance in its annual reports and other documents.
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1 "Net Zero Asset Managers Initiative", October 11, 2021 on www.netzeroassetmanagers.org.
2 "Super funds call for net zero targets, warn savings at risk",The Syndney Morning Herald, October 1, 2021, www.smh.com.au/business/banking-and-finance/super-funds-call-for-national-net-zero-target-warn-savings-at-risk-20210930-p58vzy.html.
3 Data as of October 2021.