This article is sponsored by Apex Group.
Reporting ESG and carbon footprint data has become much more complicated, with today’s investors demanding more accurate, detailed data from private equity fund managers and their portfolio companies. Joshua Brunert, global head of ESG product at Apex Group, and Hari Bhambra, global head of compliance solutions for the global financial services provider, consider how this reporting is evolving under these heightened demands and how companies are adapting.
How should the G in ESG metrics – governance – play a role in assessing carbon footprints?
Hari Bhambra: One of the key elements of ESG is responsible governance: how businesses operate, what their transition planning arrangements are for lowering their carbon footprint, what commitments they are making and how they are actually implementing and executing the decisions at a governance level to give effect to the changes that are needed.
A second piece is when we look at calculating a business’s carbon footprint. We look at the emissions, among other factors, and then we also consider how they intend to preserve certain parts of the environment. So, we want to see what they are looking at and what are those key components.
It is also important to understand how a business or even a country will practically implement a change or look at other aspects of their impact. And you have to look at the phase of transitioning: how are you going to achieve carbon reduction goals and uphold the legal or social and governance demands in a particular jurisdiction? This will impact the speed of that transition.
A further consideration is the role of gender diversity in governance – interestingly, the ECB in its February 2022 report noted that “after the Paris Agreement, firms with greater gender diversity at the management level reduced their CO2 emissions by about 5 percent more than firms with more male managers.”
The report went on further to indicate that its research assessed firm-corporate governance characteristics with firm-level carbon dioxide (CO2) emissions over the period 2009-19 to study the relationship between gender diversity in the workplace and firm carbon emissions. It was noted that a 1 percentage point increase in the percentage of female managers within the firm leads to a 0.5 percent decrease in CO2 emissions.
What are some of the wider complexities that investors need to be aware of when trying to achieve carbon offsets within their climate strategies?
Joshua Brunert: The main thing – and this is underlined in all the reports of the UN and other bodies – is that offsetting is a last resort. It is very important to stress that. Offsetting is basically compensation for the emissions that investors cannot reduce elsewhere.
What investors need to do, to begin with, is understand where their major emissions sources are to start measuring their footprint; focus on getting the actual data and try to avoid making assumptions. Then investors need to be reducing as far and as much as possible across those emissions sources. And then, only when they cannot reduce any further, investors have got to compensate for the emissions via offsetting.
What this means for investors is that they cannot really claim to be net zero if they are just offsetting whatever they emit. That balance doesn’t work if they haven’t first tried to reduce.
It is important to understand that emissions are components across the entire value chain. For investors, it is not only the companies themselves and their emissions, but it is also their wider upstream and downstream emissions caused by the procurement practices of those companies in the supply chain and the use of their products and services.
Why is carbon reporting such a challenge?
JB: The really big challenge we see with portfolio companies is that, on the whole, they really do want to be able to accomplish climate goals and ESG reporting, but have no idea where to begin. What we tend to find is that individual businesses may have goodwill, but they lack time, knowledge and resources.
We help overcome that challenge not just by providing a carbon calculator for companies to input numbers and get results, but actually supporting companies so that they understand where their major emission sources are, how they can collect data and, where they don’t have data, how we can fill the gap with proxies and make it easier for them. Then when they ultimately get their results, we provide meaning to that by outlining their relative performance against their sector peers, setting targets, the costs to offset their footprint, and giving them the roadmap for how to improve going forward.
The challenges really come down to the fundamental issue of data quality. A company of 100 employees will not have a person dedicated to this – it is just someone taking on this role in addition to their day job and they don’t have the specialist knowledge and expertise, so outsourcing it to reputable providers is key.
On an aggregate level, particularly for investors, what is important is that this data has good integrity, because when you are making decisions around that data or forwarding it to your investors or regulators, you need to be 100 percent certain that you are working with good quality data.
What level of accuracy should investors expect from carbon data reporting and how can they ensure that they receive accurate data?
JB: The big elephant in the room is that investors are wanting and expecting accurate carbon footprints, but they are not getting that. We have seen a lot of companies just get over the line by making estimations and assumptions at very significant aggregate levels.
If you are looking at a portfolio of 100 companies, they might just run the model that says ‘here is the average carbon emissions by sector multiplied by 100 companies, so this is the estimated footprint.’ The disappointing thing is that that has been acceptable for the last few years.
The dial is shifting because investors are going back and asking about these calculations using averages by company size and sector and it doesn’t tell you anything; it is meaningless. That is why people are now under pressure to go with a bottom-up analysis and to understand how important facets of driving real emissions reductions are linked directly to reducing overhead expenses and, therefore, improving your bottom line.
Investors also want to make sure that carbon footprint data is auditable, even if it was calculated elsewhere, to ensure a high level of integrity. Private companies that are small and growing fast, in particular, need tailored support on how to deliver it.
How does carbon reporting and assessing impact investor strategies overall?
JB: We have seen a wide range across the spectrum: some want to get over the line to just meet base level investor or regulatory demands; and you then have others who are understanding that they are gaining a competitive advantage by demonstrating their credentials in the area. The majority is possibly somewhere in between.
Depending on where they sit on that spectrum, those that are just going through the motions will go with the path of least resistance. However, those that can actually see the long-term value in this, and understand where the world is moving and how quickly it is moving there, realize that accurate data is going to be key.
In a competitive environment, they stand out from those that are just getting over the line. It also gives them a good platform if they want to start setting meaningful targets for net-zero carbon emissions, for example. They can market their funds as climate transition funds and open up to a whole new generation of investors who have taken climate goals seriously and want to put their capital in more impact-focused funds.
How does ESG reporting on gender issues intersect with the carbon footprint assessment issue?
HB: In order to protect the climate, we need to think about social and governance impact also. One related area that I have a particular interest in is women’s empowerment and economic engagement.
If we look at attempts to reverse climate damage or restore the climate, women play a key, if not the leading role in nurturing and understanding the environment and how to remediate damage to it, particularly in rural locations. Unfortunately, a lot of the time, the land that is to be restored is not in the hands of women to own it or manage it and they may also lack educational support, impeding their ability to take decisions that matter.
We need to address these impediments for us to move forward. If we are looking at reducing carbon emissions in all jurisdictions and reversing some of the damage, we have to look at who is actually participating in those decisions. What is the role of women in those jurisdictions and economies, and do they have the legal and governance rights and mechanisms to be able to participate?
Currently, it is not consistent across global locations. It is about making sure that a holistic view is taken when we are looking at carbon emissions, carbon offsetting and environmental restoration which also takes into account the various implications of women’s roles and rights in those jurisdictions.