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In the land of Climate Risk – data is King

, James King

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In the land of Climate Risk – data is King

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With every week the number of stories in the media concerning "climate" and "ESG" grows and grows. Evidence that the world is slowly but surely starting to look at everything through a different lens? Well maybe not....

 

There were two stories that really caught my eye back in May and, I would suggest, are worth returning to as they reflect some of the reality that not everything is as it appears - and that the topics of climate change (and ESG) have some way to go before they lead to real change. I am not here to comment personally on either story, barring the importance of data in discussing climate, but I would suggest that both support the argument that government bodies are making in requiring companies to disclose climate data and standardise reporting.

 

 

‘Who Cares If Miami Is 6 Meters Underwater In 100 Years?' - A statement from Stuart Kirk, Head of Responsible Investment at HSBC Asset Management.

 

Statements like these require some context so I am providing the original and full presentation on youtube which is really worth a watch (get the popcorn ready!) and also a written article on Forbes that has some reaction and commentary.

 

There are many extraordinary things in this video which, in my opinion, caused a furore within the community of people working on ESG, climate and responsible investing in the finance sector. However what is most striking is the lack of data and how inadequate it is for the points it was trying to justify

  • The 80 year (!) linear GDP projection - 5mins in
  • The impact on death rates using backward-looking data and suggesting this is predictive of the future - 6mins in
  • The slides on the SP500 returns and negative periods all backward looking again suggesting this is predictive of the future - 14mins on

Regardless of my opinion or that of the author, we cannot really have a useful discussion if the data is presented this way and doesn't at least show a range of forward-looking scenarios and the assumptions made when creating it.

 

 

‘Could Google’s Carbon Emissions Have Effectively Doubled Overnight?’ -

 

As climate data evolves we are starting to see the wider picture on the emissions from companies, as this great article from the NewYorker highlights. 

 

"Beginning in 2001, companies that want to pay attention to their progress—which includes the companies mentioned in the new report—have used a set of “greenhouse-gas protocols” which are overseen by the World Resources Institute, a global nonprofit organization. Under the protocols, a business can report its Scope 1, Scope 2, and Scope 3 emissions.

 

Scope 1 includes direct emissions from operations that a company controls or owns: a factory’s boilers; a delivery fleet’s gas tanks. Scope 2 emissions come from energy purchased by a company, such as those that a local utility produces when generating power for the company. And Scope 3 emissions are the indirect emissions that “occur in a company’s value chain,” such as, for example, the carbon produced by the companies that make the aluminium casings for Google’s phones"

 

The inclusion of any analysis of scope 3 emissions is likely to have a huge impact to our knowledge and understanding of emissions, but the early findings show that the participation in financial markets is likely to have a significant impact on a companies’ net emissions. An example of this can be found in the article

 

"For Microsoft in 2021, the report claims, “the emissions generated by the company’s $130 billion in cash and investments were comparable to the cumulative emissions generated by the manufacturing, transporting, and use of every Microsoft product in the world."

 

 

How are UK pension funds coping with an ever-changing data landscape?

The UK pension fund industry is determined to  create an environment where climate and emissions can be openly discussed and polices (i.e. net zero targets) to reduce climate risk are actionable and impactful. Helpfully the UK Department of Work and Pensions (DWP) has introduced regulation impacting UK pension funds that will require pension funds to:

• Report on the emissions data (scope 1 and 2 and later 3) on investments in their plans
• Provide scenario analysis
• Provide targets
• Establish climate risk management processes and governance 

The industry has accepted the burden that arises from data as part of the territory. After all as the old proverb states "in the land of the blind the one-eyed man is king". The next challenge the industry faces  is seeking truly adaptive methods to improve climate capabilities whilst controlling the costs of data and reporting. Technologies such as AMX Zero can play an important role democratising access to data and reporting. At AMX we believe seeing clearly, across the landscape of climate risk, should be a financial benefit for schemes and not a financial barrier.

 

 

 

Photo by Ivan Diaz on Unsplash


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