Lack of consistent data proves challenging for IROs dealing with responsible investors
Investors are increasingly keen to fight climate change, but the lack of consistent data is making things more difficult – and it is IROs who will have to deal with the challenge, according to experts.
Interest in protecting portfolios from climate change has been growing and was given an extra push last December after a deal was struck in Paris. But a lack of standard guidelines is making it hard for investors to determine how much their portfolios are contributing to carbon emissions.
A recent MSCI study compares two approaches to estimating carbon emissions. The study looks at 277 firms from the MSCI All World Companies Index that disclosed their carbon emissions in 2015 for the first time using the MSCI ESG research approach, and compares this to the Economic Input-Output Life Cycle Assessment (EIO-LCA) data approach.
‘The implication is that institutional investors may actually be overstating the carbon output of their portfolios if they rely on the EIO-LCA data-based estimation approach, because estimated values are more likely to inflate total portfolio carbon footprint,’ the study notes.
Erika Karp, founder of Cornerstone Capital Group, wealth management and corporate consulting firm focused on sustainable investment, explains: ‘We need standards for the disclosure of material ESG information. Without a common language, we are missing a piece of financial infrastructure.’
There has been some progress on creating standards, starting with the establishment of the Sustainability Accounting Standards Board (SASB) five years ago. SASB issued provisional sustainability standards for 79 industries and is seeking feedback but until these are set and adopted across all companies there remains a lack of consistency.
Spanish oil firm Repsol says that because there are no specific guidelines it does not use a specific format such as the MSCI ESG or the EIO-LCA for calculating its carbon emissions. Despite this, Repsol has been recognized as one of the best oil and gas companies for its carbon strategy by the Carbon Disclosure Project. In 2015, the company received a 100/100 score for disclosure.
What’s an IRO to do?
Given the lack of consistent data, it is crucial for IROs to communicate their company’s ESG policy and impact on the environment. But articulating the message is not enough, says Karp, as investors are increasingly likely to want to see these policies being integrated into the company’s philosophy. ‘It’s critical that it is not simply an exercise in marketing and that there is integrated thinking at a governance level,’ she says.
Repsol has created several presentations on its environmental impact and has an annual investor day dedicated to SRI investing but it acknowledges that it is difficult to do any of this without a standard methodology.
Some companies have come under fire for causing ‘severe environmental damage’, leading Norway’s $900 bn sovereign wealth fund (SWF) to create a ‘blacklist’ of firms it will not invest in. Last week it added US utility Duke Energy to the list that already includes Airbus, Boeing, Philip Morris, Rio Tinto and WalMart.
The SWF owns an average of 1.3 percent of every listed company across the globe. Its influence and reputation mean other investors and shareholders often place extra weight on its decisions.
