The Net Zero Asset Owner Alliance is calling on asset owners and asset managers to adopt the approach laid out in a technical paper, published today, on how to identify the reasons for decarbonisation.
The ‘emissions attribution analysis’ is intended to be applied to portfolios with net zero ambitions. It is based on long-standing practices for attributing financial performance.
“We’ve tried to adapt these models to the context of carbon emissions, so the question is no longer about how the portfolio performed versus the benchmark, but how did emissions change versus the previous year,” explained Moreno Capretti, an analyst at insurer Intesa Sanpaolo Vita, and one of the authors of the report. “So you’re comparing the portfolio against itself.”
There are various reasons why carbon emissions may change within a portfolio. Asset allocation decisions may result in an investor holding companies with different emissions profiles over a period of time, or allocation could remain the same but the underlying companies might decarbonise their business activities.
Changes can also be driven by less meaningful factors, such as market volatility. Most investors use an emissions intensity metric to determine the carbon levels associated with a portfolio. These are often calculated by dividing absolute emissions by an economic measure, such as turnover, revenue or output.
If these numbers go up or down significantly, it can completely alter the carbon intensity calculation, even when a company’s absolute emissions remain the same.
Elke Pfeiffer, sustainable transformation lead at Allianz Investment Management and another author of the technical paper, told IPE: “The idea behind this is to give every single asset owner and asset manager a tool to support their efforts to decarbonise their investment portfolios.”
Smaller asset owners with limited resources should ask their asset managers to undertake the emissions attribution analysis on their behalf, she suggested.
“The main thing is that investors start implementing this tool, because it’s key for informing your investment portfolio decarbonisation, and the way you engage with your asset managers and investee companies.”
The paper focuses on emissions attributions within listed equities and corporate bond portfolios. However, Capretti said, “in theory, you could extend the framework to other asset classes, like sovereigns and private equity, if the data was available.”
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