Dealing with decarbonisation

Source Total U.S. Emissions in 2019 = 6,558 Million Metric Tons of CO₂equivalent (excludes land sector). Percentages may not add up to 100% due to independent rounding. www.epa.gov/ghgemissions/overview-greenhouse-gases

Not all carbon is equal
There are a number of pathways to assessing climate risk through carbon. The main sources of carbon varies by industry sector – some companies and sectors are more carbon-intensive than others, such as the Oil & Gas, Transportation and Industrials. A company’s scope 1, scope 2 and scope 3 emissions is another source of carbon, which we’ve outlined below:

Scope 1
This looks at carbon emissions of an issuer or company under its direct control. Examples include fleet vehicles, boilers, combustion and chemical productions

Scope 2
Involves indirect carbon emissions. This looks at emissions from purchase or acquired electricity heat and cooling.

Scope 3
Scope 3 carbon emissions looks at everything beyond a company’s direct scope of operations. This includes emissions across an issuer’s supply chain and end-product usage by its customers. As such, scope 3 looks at a range of indirect emissions, such as business travel, employee commuting, purchased goods and services and capital goods. Issuers have less visibility and control over these emissions – but they remain important. For example, according to MSCI, scope 3 emissions of the integrated oil and gas industry (measured by the constituents of the MSCI ACWI Index) are more than six times the level of its Scope 1 and 2 emissions[4].

Currently, the predominant measure of greenhouse gases are Scope 1 and Scope 2 emissions data, as there is a level of uncertainty surrounding Scope 3 emissions and they are typically not included in corporate disclosure. These metrics help determine how exposed issuers may be to climate change and transition impacts that may emerge towards net-zero.

Furthermore, all sectors generate a carbon footprint, primarily through the energy they use, but some sectors are more carbon intensive than others. Over 70% of global greenhouse gas emissions (or carbon) can be traced to energy generation across all industry sectors, which is outlined in the chart below. The energy transition is a core focus in reducing these emissions as issuers turn to energy conservation, renewables and switches to low-carbon electricity.

Around 40% of global greenhouse emissions are driven or influenced by companies through their purchases (purchased goods and services) and through the products they sell (use of sold products)[5]

Considering impacts of climate change
We are heavily focused on the strategy that issuers have in transitioning to lower carbon, looking at actions to decrease emissions in the short-term and in the long-term – and reviewing their momentum of change. Understanding the full picture of their emissions, especially across their value chain, will be key. With this in mind, it’s important to continue encouraging companies across sectors to disclose and be more transparent on their carbon emissions across the value chain by disclosing in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. This will help harmonise disclosed data and identify hotspots, which we can explore further through our engagement programme with issuers.

We focus on bottom-up climate-related risk analysis to understand how well issuers are factoring in climate and transition risks so we can better understand the investment impacts.  However, one year’s worth of data only provides a snapshot - we need to measure this information in a consistent way year after year to identify if there is a positive momentum by issuers in reducing their greenhouse gas emissions.

Managing risks and opportunities in decarbonisation
As the global economy decarbonises, industries will experience positive disruption and staying competitive in this environment will separate out those issuers that are successful in navigating the energy transition and those that are not.

There is also an opportunity, as investors, to shift capital away from carbon intensive industries and companies, for which renewables are a viable alternative (i.e., thermal coal industry). We believe that decarbonising to meet net-zero alignment by 2050 and the interim goal of 50% emission reductions by 2030 requires a quick and complete phasing out of thermal coal. Consequently, exclude pure thermal coal players. This reduces our risk and exposure to carbon-intensive and carbon-dependent companies and industries; and manages stranded-asset risk and long-term environmental risks.

Our focus then shifts on a two-pronged approach. First, using our capacity as investors to allocate capital and reward companies that are changing their businesses and adopting climate solutions. These solutions can range from electrification to energy efficiency to renewable storage solutions. Second, engage with companies in high emitting industries (such as car, agriculture or oil and gas companies). These companies are themselves looking to invest to change their business to accelerate the energy transition and arrive at Paris aligned business activities.

[1]source: UNEP Emissions Gap Report 2020: https://wedocs.unep.org/bitstream/handle/20.500.11822/34438/EGR20ESE.pdf

[2]source: UNEP Emissions Gap Report 2020: https://wedocs.unep.org/bitstream/handle/20.500.11822/34438/EGR20ESE.pdf

[4]https://www.msci.com/www/blog-posts/scope-3-carbon-emissions-seeing/02092372761 

[5]https://sciencebasedtargets.org/resources/files/SBT_Value_Chain_Report-1.pdf 

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