When South Pole Carbon Asset Management wanted to create a product that would let investors offset emissions generated by their shareholdings, they found that reliable emissions data was hard to come by. So they developed a methodology that would let them extrapolate emissions data from publicly-available information.
20 July 2012 | Max Horster joined South Pole Carbon Asset Management two years ago to design climate-neutral investment portfolios. But there was a problem: only 3,000 of the world’s 40,000 listed companies published emission figures, and most of these weren’t trustworthy.
It’s not that companies are purposely hiding the correct numbers, he says. They just don’t put much effort into it.
“In an extreme case, they’ll bring in an intern who studied natural science, and they’ll say, ‘Hey can you do our carbon footprinting?’” he explains. “And this intern may misplace a zero or confuse thousands with millions – resulting in not so great data – but it is still given to investors to supposedly help them make responsible investment decisions.”
So he created an online tool that’s helping institutional investors develop a global database of emissions for all listed companies. It works by first identifying those companies whose self-disclosed emissions are trustworthy and then extrapolating to similar companies. This data is then used to formulate questions for stockholders to ask their companies concerning environmental policies and regulations. Institutional investors can become actively engaged in a company’s strategy for sustainability and management of emission reductions – although, to reach management, the investor must have a sizable and long-term investment in the company.
PGGM in the Netherlands, one of the largest pension funds in Europe, is already engaging with the companies they are invested in about the issues of climate change.
How It Works
The first step in creating a database was to develop methodologies that could help them develop credible estimates of carbon emissions for companies that don’t report any data – and to verify the emissions of those companies who do report. For this, South Pole turned to one of the world’s top universities, the Eidgení¶ssische Technische Hochschule Zí¼rich (ETH Zí¼rich, or the Federal Institute of Technology, Zurich), for expertise in carbon accounting and relating carbon data with financial data. South Pole developed detailed methodologies that include 125 different industry sub-sectors, each with four different approximation models, which corresponds with the different company types that comprise the database.
Who Do You Trust
Next, the company tries to determine which of the self-disclosed footprints are trustworthy, using guidelines such as consistency of data over time and the restuls of external audits. If data reported by a company falls below a certain baseline in the trust metric, the information is disregarded.
“Much of the financial sector use this data unquestioningly and unchecked,” Horster says. “But it’s not externally verified and it’s just not trustworthy.”
Indeed, he says, the self-reported data from one out of four companies is discarded at this point.
Categorize By Carbon – Not Sector
The next step is to divide the companies that do pass muster based on their carbon profiles rather than on their industry.
“When you classify companies in sub-sectors, you want to make sure that they make sense under a carbon aspect,” Horster says, using the example of the oil and gas storage and transportation industry.
“Oil is transported in different ways, causing the carbon footprint size of the industry to vary,” he says. “Companies that transport oil on ships actually share their carbon profile with the shipping industry rather than with oil companies who transport oil through pipelines.”
Dealing With Uncertainty
The sub-sectors include the verified self-reported data and also the companies that didn’t disclose. The verified information helps estimate the carbon footprint of companies with similar profiles along with the four sector specific coefficient models. The coefficient models measure emissions by company elements like the amount of revenue and number of employees.
The database also rates each emission estimate based on how trustworthy the data is, and investors are also told if the information was self disclosed or approximated.
“When you have a sub-sector with only five companies reporting, the approximation of the six companies is not as good as when you have a sub-sector with 60 companies reporting,” Horster explains.
If a company disputes South Pole’s conclusion on their carbon emissions, they are given an opportunity to prove the database wrong using their own research.
“That might be an incentive to deploy more money or resources to do it right,” says Horster.
Part of a Trend
A growing trend of transparency is seen in other places as well. At last month’s United Nations Conference on Sustainable Development (Rio +20) in Rio de Janiero, UK Deputy Prime Minister Nick Clegg announced that companies on the London Stock Exchange must disclose their emissions, joining NASDAQ-OMX and other stock exchanges which say they are encouraging. companies to list environmental risks.
South Pole trusts the database will provide decision makers over a wide range of sectors with the knowledge needed to make informed decisions. And the transparency trend will hopefully help businesses and organizations better manage their environmental impact.
The Next Steps
Currently, South Pole is distributing it to specific investors but they hope to have the online tool available by the end of the year.
“We’re interested to see how others use it,” says Horster, “We hope it will trigger some interest from companies outside the financial industry.”
Consultancies have already expressed interest in the database for supply-chain assessment, and Horster believes it can be used for research purposes and as a possible tool for measuring social responsibility.
Private Swiss banking group Julius Bí¤r is the first to use South Pole’s tool, and believes it will be instrumental in providing carbon neutralizing services to their clients. “We are proud to have been the first user of this service in the banking industry,” says Silvia Wegmann, the bank’s sustainability officer. “Based on this CO2 reporting, the client decides in a second step for one or multiple means to reduce those CO2 emissions, and by that to protect the environment.”
Please see our Reprint Guidelines for details on republishing our articles.