Max Horster joined South Pole Carbon Asset Management two years ago to design climate-neutral investment portfolios. But there was a problem: Only 3,000 of the world’s 40,000 listed companies published emission figures, and most of those weren’t trustworthy.
It’s not that companies are purposely hiding the correct numbers, he said. They just don’t put much effort into it.
“In an extreme case, they'll bring in an intern who studied natural science, and they'll say, ‘Hey can you do our carbon footprinting?’” he explained. “And this intern may misplace a zero or confuse thousands with millions -- resulting in not so great data – but it is still given to investors to supposedly help them make responsible investment decisions.”
So he created an online tool that’s helping institutional investors develop a global database of emissions for all listed companies. It works by first identifying those companies whose self-disclosed emissions are trustworthy and then extrapolating to similar companies. This data is then used to formulate questions for stockholders to ask their companies concerning environmental policies and regulations. Institutional investors can become actively engaged in a company’s strategy for sustainability and management of emission reductions -- although, to reach management, the investor must have a sizable and long-term investment in the company.
PGGM in the Netherlands, one of the largest pension funds in Europe, is already engaging with the companies they are invested in about the issues of climate change.
How it works
The first step in creating a database was to develop methodologies that could help them develop credible estimates of carbon emissions for companies that don’t report any data – and to verify the emissions of those companies who do report. For this, South Pole turned to one of the world’s top universities, the Eidgenössische Technische Hochschule Zürich (ETH Zürich, or the Federal Institute of Technology, Zurich), for expertise in carbon accounting and relating carbon data with financial data. South Pole developed detailed methodologies that include 125 different industry sub-sectors, each with four different approximation models, which corresponds with the different company types that comprise the database.
Who do you trust
Next, the company tries to determine which of the self-disclosed footprints are trustworthy, using guidelines such as consistency of data over time and the restuls of external audits. If data reported by a company falls below a certain baseline in the trust metric, the information is disregarded.
“Much of the financial sector use this data unquestioningly and unchecked,” Horster said. “But it’s not externally verified and it’s just not trustworthy.”
Indeed, he said, the self-reported data from one out of four companies is discarded at this point.
Categorize by carbon, not sector
The next step is to separate the companies that do pass muster based on their carbon profiles rather than on their industry.
“When you classify companies in sub-sectors, you want to make sure that they make sense under a carbon aspect,” Horster said, using the example of the oil and gas storage and transportation industry.
“Oil is transported in different ways, causing the carbon footprint size of the industry to vary,” he said. “Companies that transport oil on ships actually share their carbon profile with the shipping industry rather than with oil companies who transport oil through pipelines.”
Next page: Using estimates to pry out raw data
Image of database table courtesy of David Castillo Dominici via Shutterstock.
