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What is portfolio carbon footprinting?

By Annabell James
28th April 2020

To meet stakeholder expectations and manage climate-related risks and opportunities, financial institutions need to first measure the carbon impact of their investment portfolios. Calculating the carbon emissions that occur as a result of a company’s investment activities is known as portfolio carbon footprinting. 

A portfolio carbon footprint is a useful tool to help understand a business’ exposure to climate change, useful for both internal and external stakeholders. It acts as a baseline on which you can set net zero decarbonisation targets aligned with climate science. 

Getting the analysis right is critical to ensuring you have the right targets and investment strategies in place to mitigate climate risks. There is an exciting opportunity to develop new products that facilitate the transition towards a zero carbon economy, and getting these figures right will provide the evidence needed to demonstrate the credibility of the positive impacts your products are having to clients and customers.

 

How does this impact the finance sector?

There is growing awareness on the negative impact climate change will have on our financial system. Financial institutions are coming under increasing pressure to disclose the financial risk of climate change within their investment portfolios, and disclose how they are planning to finance a zero-carbon future. 

Recent developments are sending a clear signal to financial institutions to take action now to start building capabilities and knowledge on how to quantify and manage climate-related risks and opportunities. For example:   

  • TCFD recommendations: Recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) are due to become mandatory in the UK by 2022. The TCFD provides users with a framework to quantify and disclose the financial impact of climate on the business. For financial institutions, this includes a requirement to disclose portfolio carbon footprinting metrics.
  • SBTi: The Science Based Targets initiative (SBTi) is due to release a methodology for financial institutions to set science-based carbon reduction targets in the summer. The targets will need to be set against a credible, robust portfolio carbon footprint baseline. 
  • CDP: In 2020 the CDP introduced a sector-specific questionnaire for financial institutions. For the first time, firms are required to disclose publicly their portfolio carbon footprinting data at a granular level to investors and customers within their Scope 3 emissions reporting. 

How do you do it?

A portfolio carbon footprint relies on collecting the right data to then measure the carbon impact of investment portfolios. In summary, you gather the data, calculate emissions using standard emission factors, normalise the data so it’s comparable across the portfolio, allocate emissions based on your level of investment, and aggregate the results to calculate the total portfolio carbon footprint. 

However, complexity comes when trying to handle large data sets and different methodologies for different asset classes. See a summary of different data approaches for a range of asset classes in the table below. 

Asset Class Data Approach
Private Equity Funds Collect data directly from each business within individual funds
Real Estate & Infrastructure Funds Collect data directly from each asset/project within individual funds
Listed Equity Funds Use third party data resources such as CDP, MSCI or Sustainalytics
Debt Funds Collect data directly from companies or use third party data resources

 

Other challenges to consider are the boundary of emissions included within the assessment. Scope 1 & 2 should be included as a minimum, but Scope 3 data if available should be captured as climate risks are often hidden within the wider value chain. Companies should also be transparent on the estimation techniques they have used to fill data gaps when compiling the portfolio emissions footprint. 

How is Carbon Intelligence supporting Private Equity firms?  

We have built a bespoke tool to support Private Equity firms with portfolio carbon footprinting. The easy to use, online tool saves time and money by making it simple to gather high-quality sustainability data directly from investee companies. Outputs are aligned with the GHG Protocol and undergo rigorous verification processes. The interactive dashboards and hotspotting analysis gives firms insight into their carbon exposure and the ability to measure progress towards ESG goals. 

 

Looking for help? 

Carbon Intelligence uses a mix of technology, technical expertise and engagement to help Financial Institutions effectively calculate the emissions footprint of their investment portfolios. Whether using third party data sets, or bespoke tools, we help companies bring everything together into a cohesive approach to drive overall business impact. If you’re looking for help in this are, please get in touch with cdp@carbon.ci