Changes in the regulatory landscape mean the need for asset managers to accurately disclose their financed carbon emissions is becoming increasingly urgent.
Carbon disclosure mandates, increased consumer awareness around climate issues, and growing climate risks associated with investments are collectively adding pressure for both enterprises and financial institutions to calculate, manage and report their greenhouse gas (GHG) emissions.
And it’s not just the emissions from their operations. It’s even more critical to measure, manage and report on their ‘Scope 3’ impacts – that is, the emissions from assets not owned or controlled by the reporting organization. For financial services companies, this includes the climate impacts of investments and other financial transactions.
Climate disclosure mandates
In April 2022, two of the world’s largest economies, the UK and Japan, will be the first G20 countries to mandate climate disclosure for listed companies. The disclosures will be based on the recommendations of the Task Force for Climate-Related Disclosures (TCFD).
Similar mandates are expected to be announced shortly in the US and the EU. All of these new mandates will require audited and assured climate information to be integrated into the company’s financial statements.
Even more relevant to asset managers is the EU’s Sustainable Finance Disclosure Regulation (SFDR). This new requirement comes into effect in January of 2023 and requires a series of sustainability-related disclosures in the documentation of a financial product and on the asset manager’s website. These disclosures include the climate impact of any financial product which has a carbon emissions reduction objective.
From optional to compulsory
Concurrent with the rise of carbon disclosure mandates, the risks associated with investing in carbon-intensive industries are growing ever more apparent. Investments in GHG intensive industries may incur outsized risks due to the likelihood of carbon emissions regulations in the future.
Within this new paradigm of growing public awareness, disclosure mandates, and the likelihood of emission regulations, asset managers must understand and disclose the climate-related risks in their portfolios.
All of these factors add up to make it no longer optional that asset managers embark on the journey of calculating, managing, and reporting on their GHG emissions.
The financed emission problem
Asset managers will play a crucial role in mitigating and adapting to climate change by steering the flow of capital towards the transition to a decarbonised economy. These capital decisions will benefit the environment and the bottom line as asset managers take advantage of the economic opportunities in the energy transition and de-risk their portfolio from climate-related impacts.
To make these critical decisions, asset managers need reliable information on their ‘financed emissions’. These are the climate impacts associated with the financial transactions made by asset managers.
A study from CDP identified financed emissions as the vast majority of the carbon footprint for financial services companies comes from financed emissions. While only 25% of financial institutions report on their financed emissions, CDP found that they average 700 times more than their operational emissions. This means the majority of asset managers are only reporting on less than a quarter of 1% of their overall emissions.
The key issue surrounding the disclosure of financed emissions is the difficulty in quantifying them. A large asset manager can have thousands of different assets and make millions of transactions each year. Cutting-edge information technology is needed to estimate carbon emissions from each of these assets.
Thankfully, new standards and guidelines have been developed that provide the foundation for these calculations.
The de facto global accounting standard for financed emissions has been created by the Partnership for Carbon Accounting Financials (PCAF). The PCAF framework provides formulas for allocating the carbon impacts for transactions in eight major asset classes.
New tools for the job
Historically, calculating an entity’s carbon emissions has been a very niche practice conducted by consultants on spreadsheets. While expensive and complex, this process delivers information that falls short of the needs of asset managers.
There is a new category of cutting-edge software to address this need called Climate Management and Accounting Platforms (CMAP). This set of SAAS companies can deliver substantially more reliable, timely and cost-effective carbon accounting information.
CMAP systems are the enterprise resource planning (ERP) platform for carbon accounting and disclosure. A CMAP system ingests information from other ERP systems and applies the most relevant emissions estimation factors for every transaction.
For asset managers, the most significant carbon information is their financed emissions which will provide the data needed to identify climate risks and opportunities within their portfolios. n