Scrap group CO2 data for physical asset info, think-tank tells Financial Stability Board

Traditional aggregated corporate climate change disclosure methods should be scrapped and replaced by ‘asset-level’ data that could allow investors to better assess the risks in their equity portfolios, according to a report produced by Paris-based Two Degrees Investing Initiative and researchers at Oxford University’s Smith School of Enterprise.
It comes at a time of open discussion about CO2 reporting mechanisms against the backdrop of the work of the high-level Task Force on Climate-related Financial Disclosures (TFCD) headed by former New York Mayor Michael Bloomberg at the behest of the Financial Stability Board (FSB). The TFCD will develop voluntary climate financial disclosures by early next year for use by corporates to provide information to their lenders, insurers and investors.
The report says there are several flaws in corporate climate reporting including data aggregation, corporate non-reporters, and skewed coverage to the biggest listed companies. This leaves out other major climate-relevant asset classes such as private equity, sovereigns, municipalities, real assets, and asset-backed securities that can represent upwards of 50% of an institutional investor portfolio.
Asset-level data, it says, would instead look at the underlying physical assets (i.e. energy plants) of a company rather than combined group data. It could, the report says, with the aid of more inputs, provide widely comparable CO2 numbers for listed companies, institutions or other organizations, to assess climate goal alignment, transition risks or exposure to physical risk.
The carbon-related disclosures that companies are asked for now are not useful tools for assessing, for example, the carbon alignment of equity portfolios, says Stan Dupré, founder and director at Two Degrees. He added: “They are too backward-looking, carbon scores get aggregated at a group level and you can’t break them down by technology or business. There’s no way to compare the data with climate scenarios, or with other companies.”Instead, the report suggests a blueprint for a new climate disclosure framework based on a central database of companies and their physical assets. Dupré says that particularly in carbon-expensive industries, such as oil and gas, much of this information is already available through assessments of physical plant and infrastructure.
Two Degrees and Smith School researchers have already started linking companies’ physical assets with their listed owners and related stock tickers across three major sectors – power, automotive and oil & gas – with plans to join forces with the University of Zurich later this year to extend the analysis to non-listed and state-owned companies.
Dupré explains that from this point the plan is to have companies validate the third-party data themselves. Two Degrees, working alongside the Carbon Disclosure Project and the French Environment and Energy Management Agency, have consulted reporting companies and found that most are willing to maintain their own data, with most seeing “an opportunity to reduce the reporting burden while improving standardization”, the report says. Dupré adds: “Overall it’s a huge amount of work, but globally speaking it is possible to have every company covered with forward-looking data at a price of about 1% that of companies having to report on an individual basis.”
From there, plans are in place to create a “one-stop shop” for investors to create and assess their portfolios according to the integrated sustainability data, with plans to roll out the platform across 10 countries. For now, a group of 60 investors are testing the existing database by assessing around a hundred portfolios.
As investor demand for carbon-responsible portfolios increases and regulation tightens, Dupré sees a lot of advantages in the system, not least of which is that even non-reporting companies will be assessed in the database. Indeed in France, where ESG and climate policy reporting will become mandatory for all asset owners once new legislation is brought in later this year, such a tool could be vital.
The report, titled Climate Disclosure, How to make it fly was submitted to the Financial Stability Board’s Task Force on Climate-Related Disclosure as part of its ongoing consultation.