Back to Article | Print

Read this article online at: https://www.responsible-investor.com/home/article/carbon_footprint_piece/

Responsible Investor

If carbon footprinting is the answer, then what is the question?

A group of asset owners reflect on current practice in carbon reporting.

If carbon footprinting is the answer, then what is the question?

by Asset owner group | March 23rd, 2018

Sign up for a free, no-strings trial to Responsible Investor

There are expectations on institutional investors (asset managers, asset owners, insurance companies) to report on the carbon footprint of their investment portfolios. These expectations have grown following the ratification of the Paris Agreement and the publication of the final recommendations from the FSB Task Force on Climate-Related Financial Disclosures (TCFD). In 2017, a group of European asset owners and their managers met to discuss the use of carbon footprinting as an investment management tool. Those participating included: AP1, AP2, AP3, AP4, the Church Commissioners, the Church of England Pensions Board, EAPF/Brunel Pensions Partnership, MN, PGGM, RPMI RailPen, TPT Retirement Solutions, USS, and West Midlands Pension Fund. Members of this group have, over the years, tracked the evolution of carbon footprinting, and, depending on the organisation, done the following: While each organisation had different experiences, we found that our conclusions and perspectives on carbon footprinting were strikingly similar. There was consensus on the value of carbon footprinting as a portfolio management and communications tool, but that its usefulness may be limited because of methodological and data issues.
In this short article, we summarise the group’s views on the value of carbon footprinting, we offer practical suggestions to other asset owners, asset managers and other stakeholders on the role that carbon footprinting might play in modern portfolio management, and we highlight some priorities for research and action. A more detailed paper looking across asset classes can be found in the linked paper: “If carbon footprinting is the answer, then what is the question? Asset Owners’ reflections on current practice in carbon reporting” Link to report Carbon footprinting can provide a range of valuable benefits to investors
These, depending on the details of the carbon footprint, can include: Carbon footprinting can also provide other benefits. These include: building knowledge on climate change (both within the organisation and across the investment system); understanding carbon exposure across an investment portfolio; providing a basis for discussions between asset managers and their clients about how climate change-related risks and opportunities are managed in investment portfolios; and encouraging better disclosures across the investment chain and from the underlying companies and other assets.
Methodological challenges and data issues?
However, at this point in time, there are a variety of methodological challenges and data issues that could limit the usefulness of carbon footprinting as a decision-making, engagement or communications tool. Carbon footprinting raises practical issues and concerns. These concerns are being felt most acutely in relation to public reporting given the increasing calls for institutional investors to report on the carbon footprint of their investment portfolios. This pressure has grown following the ratification of the Paris Agreement and the publication of the final recommendations from the FSB Task Force on Climate-related Financial Disclosures (TCFD).
The key issues include:

Additional thoughts and possible future steps
Investors’ decisions on how they choose to manage and report on their carbon performance should be driven primarily by their carbon and climate risk management-related aims and objectives. The carbon risk in an asset class tends to be specific to that asset class. Carbon footprinting methodologies and reporting will, therefore, be most beneficial when applied on an asset class
by asset class basis. For some asset classes, carbon footprinting might not be the most effective tool to support the management of any climate risk. Examples of this would include sovereign debt (where both the implications of amount of debt issued and a home investment bias will impact relevance) and real estate (where it is difficult to allocate emissions between tenants and owners of properties). More details of these and other examples are provided in the attached report. As a result, investors should consider, on a case-by-case basis, whether carbon footprinting is the right tool for specific asset classes or for their investment portfolio.
In order to overcome the issues identified above, and to improve the utility of carbon footprinting for asset owners and other investors, the participants identified the following areas for future discussion and collaboration:

It is hoped by all involved that the thoughts detailed here and in the linked document: “If carbon footprinting is the answer, then what is the question? Asset Owners’ reflections on current practice in carbon reporting” Link to report stimulate a constructive debate and discussion on the utility of carbon footprinting as a tool across all asset classes, and contribute to its development as a tool for climate risk management and investor communication.