This article is sponsored by Asset Impact.
One of the major issues plaguing financial institutions attempting to tackle climate change has been the lack of transparent, comparable climate data. Emissions data from company disclosures, the traditional source for this information, is not calculated consistently across companies and is often based on assumptions that are not articulated. This can create situations susceptible to greenwashing.
To address this, companies such as Asset Impact are taking a different approach. By synthesising data from multiple sources, they provide databases that link physical assets in the real economy to their owners in the financial economy. Asset Impact CEO Noémie Klein explains how this is designed to provide financial institutions with consistent and comparable information to measure and prepare for the climate impact of their portfolios.
How does an asset-based approach help measure the climate impact of a company or portfolio?
An asset-based approach starts with data on physical assets in the real economy. Data describing the activity of each physical asset is combined with other contextual data before being run through proprietary models that estimate the carbon emissions associated with the asset. This data is normalised to ensure indicators are comparable across companies and sectors and then linked to corporate ownership trees.
At Asset Impact, our asset-based data covers nine of the highest carbon-emitting sectors – coal mining, oil and gas extraction, power generation, shipping, aviation, heavy- and light-duty vehicle manufacturing, cement, and steel. We consolidate indicators from an asset’s direct owners all the way up to the parent companies and then to the financial securities they issue. Our company-level data sets provide investors with a consolidated picture of 250,000 individual assets and more than 63,000 companies, representing about 75 percent of global emissions.
An important benefit of the asset-based approach is its ability to look into the future. Historical data gives investors only a partial picture. We help complete it by incorporating companies’ capital expenditure plans, and (de-)commissioning schedules into our forward-looking indicators. These go out to 2040, giving investors a bottom-up, forward-looking picture of the companies in their portfolio, based on the assets they ultimately own.
You collect data from a range of sources. How is it validated?
We work with a variety of specialist data providers to collect asset-level data, both commercial and open-source. We also conduct research to plug data gaps and improve the accuracy of our models. We collect data from primary and secondary sources – both from speaking with companies, and analysing announcements and permitting data in government filings.
We then run a variety of tests on our data, comparing it with historical information, current industry benchmarks, forward-looking trends, and data reported by other providers.
We also track changes in assets and companies over time, refreshing our data every quarter so clients can follow changes. This helps flag any discrepancies, which we investigate and correct when necessary. Once we’re happy with the asset-level data, we consolidate everything at the company level and run our checks again, this time against external benchmarks.
Finally, we back-test our data – taking the forecasts we made in previous years and comparing them to the actual values for those years. This lets us measure differences between the two datapoints and flag discrepancies for further investigation. Any differences are generally within 5 percent of each other, giving us confidence that our forward-looking data paints an accurate picture of companies’ plans.
When we finish, we release the data to clients, giving them a consistent and coherent picture to work with.
How does asset-based data help investors navigate greenwashing risks?
Helping investors navigate corporate greenwashing was how Asset Impact, which recently joined forces with GRESB, started. We wanted to measure how financial portfolios align with net-zero scenarios in a robust and transparent way. At the time, the only publicly available data was from company reports, which are often incomplete, non-transparent, and not comparable or consistent because of the assumptions and methodologies used.
An asset-based approach using a consistent methodology is explicitly designed to solve this comparability and consistency problem. Now, financial institutions don’t need to trust what companies tell them; they can dig into data themselves and dissect what a company’s disclosure says, then compare the two. This is both a ‘sanity check’ for company reports, and a tool for building engagement strategies.
How do financial institutions use asset-based data in their climate strategies?
There are three main areas where asset-based data is being used. First, it’s a tool for financial institutions to understand and track the emissions they finance at a portfolio level over time so they can design a strategy to get their portfolio emissions to zero.
The second area is investment management. Some clients build their own analytics and tools to identify and manage climate risks in their portfolios and to measure alignment with different decarbonisation and policy scenarios. Our data can feed into a wide range of analyses useful for designing scenario-based investment strategies.
Third, financial institutions use it in engagement with clients. Asset Impact data can be used to assess companies’ transition plans and monitor what they do on the ground. Some financial institutions are integrating Asset Impact data into their due diligence processes, to screen potential new clients and hold existing ones accountable. Others are using it to develop and market new climate-aligned financial products.
What is the future of climate data in the investment industry?
Users of climate-related data are getting more sophisticated, and the demand for high-quality data is increasing. Investors and banks need visibility on the climate risks and opportunities in their portfolios.
There’s been a focus on target-setting, which points you in the right direction but doesn’t show what is really happening. Increasingly, financial institutions and regulators want to see more accurate information about how emissions are changing in practice.
Remember: reducing portfolio emissions through divestment doesn’t necessarily translate into lower emissions, because it just transfers ownership to someone else – for whom climate might be less important. Asset-based data can help financial institutions understand these dynamics by following exactly what happens on the ground, and when decarbonisation efforts result in tangible change.
In an ideal world, all company disclosures would be at the asset level, creating a common repository of basic information on asset locations and owners. Then, the industry could focus its energy not on collecting and normalising data, but on developing indicators or analysis on top of it. We think the push for transparency, comparability, and tracking of real-world impact will only keep increasing.