Beyond footprinting: Applying financials to carbon risk

In his 2022 annual letter to CEOs, BlackRock’s Larry Fink said, “Every company and every industry will be transformed by the transition to a net zero world. The question is, will you lead, or will you be led?”

 
 

When I entered the world of carbon finance some 15 years ago, I recognised that the power to drive climate change lay in the hands of the investment community.

 

Investors need to feel equipped to deal with this newfound responsibility to consider carbon risk when directing capital, but they also need to thrive in the process.

 

To echo my colleague and Emmi chair, Tim Samway, “carbon transition is the greatest investment risk of our time, while also a major opportunity for investment out-performance”.

 

To be an investor navigating this complex environment is certainly a challenge, but for those who get it right, comes a great opportunity for reward and value creation.

 

However, those investors who do not properly consider the carbon risk associated with a global transition to net zero, will see outflows of capital due to underperformance and their assets under management drastically reduce.

 

Currently, only 36 per cent of the world’s companies are compatible with 2050 net-zero targets, representing a staggering $43 trillion of manageable assets at risk.

 

But the investment community has its eyes wide open and is starting to ask the right questions about a company’s journey to net zero:

 

What are the current benchmarks to measure success?

 

Is there an effective carbon transition plan in place?

 

What are the business and financial risks of falling short?

 

What investments are required to achieve net zero goals?

 

What is the upside of success?

 

 

Beyond footprinting

Although many investors are endeavouring to integrate carbon risk into decision-making, many remain hamstrung by traditional metrics that are used for screening. Often, these metrics only indicate a company’s carbon footprint or worse, qualitative analyst judgments  and there is little an investor can do with this information.

 

The difference between a “sustainable portfolio” and one that will thrive and prosper during the great carbon transition, is factoring finance into the equation.

 

Emmi was created to take investors beyond a carbon footprint, providing access to a company or portfolio’s total value at risk as it transitions to a carbon-constrained economy. It is about the real decisions, real alpha and real change that can be generated.

 

It is also about helping investors find their solution based on their risk and return requirements, not giving the same answer to everyone in the market.

 

 

The difference is better carbon financial data

Unless absolute quality, reliable and accurate data is used to assess a company or portfolio’s alignment to various temperature scenarios, the assessment is worthless. And if you can overlay quality carbon data with financial metrics, you relieve the burden on investors to “uncover” the facts and present the industry with a universal carbon risk benchmark.

 

Emmi has delivered on this, and our assessment is called the Global Carbon Efficiency Rating (GCER). It will inform an investor about the efficiency and viability of a company or portfolio during the transition to net zero; the financial loss and opportunity against various climate scenarios; and the total value at risk.

 

By combining climate benchmarks with financial metrics, optimal carbon pathways can be projected for companies and their portfolios. This allows investors and companies to fundamentally benchmark carbon risk and invest in different strategies in an effort to earn alpha while demonstrating impact.

 

 

Putting investors in the driving seat

A major challenge for investors is that climate change and the carbon transition to net zero is politically charged and fraught with greenwashing.

 

But the backlash against greenwashing and the move towards real, transparent, quantitative data is putting investors ahead.

 

Emmi has done the legwork producing an accurate, transparent and trusted GCER for over 40,000 companies globally, giving investors a head start in understanding the loss and opportunity of their portfolios against climate scenarios, now and into the future.

 

While the GCER drives all analysis around risk and return in a carbon-constrained world, investors are benefiting from the ability to create their own scenarios and outlooks to unlock potential value.

 

The GCER takes investors on a journey, first informing where a company or portfolio sits right now with regards to temperature alignment, which in turn indicates emission reduction requirements and associated carbon costs. From here, value at risk for a company can be understood, which can then be expanded across an entire portfolio to indicate portfolio value at risk.

 

Investors can then break down Emmi’s analysis across sectors, geographies, companies and scopes, to understand the drivers of carbon risk across the portfolio along with all important benchmarking.

 

Ultimately, Emmi is helping investors answer three critical questions:

“Which of my investments will suffer?”

“Which of my investments are most likely to thrive?”

“Which of my investments won’t align with required temperature scenarios?”

 

The investors who can respond confidently to these questions will lead the way profitably to net zero.

 

Michael Lebbon, CEO of Emmi.

 

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