Case Study — 6 Dec, 2023
Navigating the Green Frontier: A Case Study on Portfolio Decarbonization
Highlights
Decarbonization commitments are on the rise as countries and organizations pledge to cut emissions as much as possible. But granular data is needed to truly understand today’s carbon emissions and set appropriate longer-term targets.
Customer Type
A large sovereign wealth fund with more than 6.5 billion USD assets under management
User Base
Chief Sustainability Officer and the sustainability team, investor relations team, and Executive Committee
Assets Under Management
6.5 billion USD
Background
The 2016 Paris Agreement is a robust framework guiding the global endeavor to achieve Net Zero emissions and is a pivotal milestone in fulfilling the Sustainable Development Goals (SDGs). Its primary objective is to combat the alarming escalation of global temperatures, limiting the increase to well below 2 degrees Celsius above pre-industrial levels, with an even more ambitious target of 1.5 degrees Celsius. This landmark agreement provides the essential direction for addressing the urgent issue of climate change.
Among the nations that have endorsed this historic accord is the country S&P Global, served on this occasion. In alignment with this commitment, the country's sovereign wealth fund (SWF) has extended these principles to its investment portfolio. Sovereign wealth funds may align with the Paris Agreement to:
- Mitigate financial, regulatory, and reputational risks.
- Embrace sustainable and responsible investing principles.
- Enhance global reputation and leadership.
- Influence market behavior towards sustainability.
The SWF approached S&P Global to update their climate policy and integrate robust carbon intensity thresholds for their key industries and sectors, Paris Agreement indicators, and coal revenue thresholds into their investment portfolio. To achieve this, the SWF's mission echoed the agreement's overarching goal: to diligently curtail global temperature rise, ideally staying under the 2-degree Celsius threshold.
Pain Points
The SWF aimed to align its investments with global climate goals and frameworks to mitigate risk, further access to capital, and remain competitive within an industry that increasingly considers sustainability a key investment decision criterion. For this purpose, the SWF wanted to establish the following:
- Paris Alignment: The customer wished to align with the Paris Agreement's goals.
- Portfolio decarbonization: SWF sought to lower the carbon footprint of its portfolio.
The entity has a history of working with S&P Global, being a longstanding customer of sustainability analytics, S&P Global and other offerings. The customer had already had overwhelmingly positive experiences with S&P Global through a yearly portfolio carbon footprint exercise and, therefore, knew that S&P Global was leveraging a robust dataset while providing exemplary customer service. The customer wanted to continue this cooperation, knowing that S&P Global could combine trusted portfolio analytics data with S&P Capital IQ Pro, a platform customers can effectively use to monitor ongoing commitments and targets.
Solution
The SWF issued a request for proposal (RFP), which outlined their strategic goals and challenges. Accordingly, Market Intelligence responded with a detailed proposal supported by expert sessions. Together with the customer, the project team established an approach that could solve the customer’s challenges efficiently.
The project followed a thorough approach and drew on portfolio emissions and Paris Alignment data. The project team, consisting of sustainability specialists, provided the following:
- Carbon intensity thresholds: The SWF sought to decarbonize by establishing carbon intensity thresholds for key industries. In other words, SWF sought to lower the amount of carbon dioxide per output unit. For this purpose, they needed a robust methodology and reliable data to measure and track the carbon emissions of their holdings.
- Paris Agreement indicators: The customer wished to align with the Paris Agreement’s goals under various climate scenarios.
- Coal revenue thresholds: SWF recognized the need to minimize exposure to coal-related activities to lower their carbon footprint. This required establishing coal revenue thresholds to guide investment decisions and reduce carbon-related risks within their portfolio.
- Engagement targets: The customer understood the importance of engaging with stakeholders to decarbonize their portfolio further. S&P Global provided a prioritization list and strategy for their stakeholder engagements with the 20 most highly emitting companies within their portfolio.
To ensure seamless and reliable monitoring, the approach included a customized, platform-based tool from S&P Capital IQ so that asset managers could monitor all the newly established climate policy elements.
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Establish the carbon footprint
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The project team established the carbon footprint of the SWF's portfolio by leveraging the Trucost Environmental dataset. Thanks to exhaustive coverage, spanning 17'000 public and 3.2 million private companies globally, S&P Global is able to assess the portfolio relying on a sound methodology. The granular dataset includes, but is not limited to; gas (GHG) emissions for Scope 1, 2, and 3 emissions; natural resource use; land, water, and air pollutants; water use and intensity; waste disposal and intensity; revenue generated from each sector of a company's operations. |
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Setting carbon intensity thresholds for key industries
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The sustainability specialists analyzed the portfolio's carbon footprint, leveraging Trucost data and industry benchmarks. Based on this analysis, the sustainability analytics experts established carbon-intensity thresholds. Following a sector-specific approach, the thresholds provided by S&P Global considered industry data available for best-in-class and worst-in-class categories. To ensure diligent monitoring, S&P Global provided the customer with a systematic process and platform-based tool, enabling SWF asset managers to assess progress towards thresholds and adjust investment decisions accordingly. |
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Defining carbon revenue thresholds
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The project team conducted a peer review to note the fund's peer's practices and targets on coal revenues and exclusions. The project team collaborated with the customer to define coal revenue thresholds based on financial viability and carbon reduction goals. This intelligence provided a foundation for SWF to manage coal-related investment risks proactively. |
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Benchmarking against Paris alignment indicator
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S&P Global benchmarked the SWF's aggregated portfolio and sub-portfolios against Trucost Paris Alignment data. The project team provided inputs on portfolio alignment to a 2-degree and well below the 2-degree scenario. The analytics specialists worked closely with SWF to integrate these indicators into their investment evaluation framework. Finally, the project team and the SWF established a monitoring tool so that the fund could diligently implement the strategy independently over the long term. |
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Outlining engagement targets
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Stakeholder engagement is key to furthering portfolio decarbonization. The project team provided engagement targets for 20 companies, focusing on the 20 companies with the highest woned emissions or those responsible for a combined 65% owned emissions in their portfolio either directly or collectively. S&P Global also provided best practice guidance on how asset managers can engage with companies and how to participate actively in the NZOA. |
Key Benefits
The SWF was provided with a robust climate policy and sustainable investment strategy. This allowed the customer to:
- Understand and incorporate best practices concerning clear and measurable carbon thresholds. S&P Global helped the customer establish quantifiable carbon intensity thresholds, enabling them to monitor progress. The project team's insights and analysis supported their objective to drive meaningful change within their portfolio.
- Integrate a more sophisticated risk management strategy by implementing coal revenue thresholds, reducing exposure to carbon-intensive investments.
Adopt the standards of the Paris Agreement by incorporating the supplied metrics into the fund's sustainable finance framework. This yielded a comprehensive perspective on the portfolio's role in supporting global and national climate objectives and enabled the customer to communicate with their vital stakeholders.