When we joined as founding members of the Net Zero Asset Managers initiative in 2020, we had already been measuring and reporting GHG metrics for our portfolios for a few years. However, we had been very much reliant on using third-party estimates. As of 2020, only 13% of our portfolio companies were disclosing scope 1 and 2 GHG emissions.
Therefore, when we initially set our net zero targets, our nearest-term priority was to engage our portfolio companies and get them to improve their reporting. Not only was this an important step in a company’s own capacity to manage and mitigate climate risk, but also important for us as investors committed to net zero. We set an ambitious target to have 100% of our portfolio companies reach Transition Pathway Initiative (TPI) Level 2 by the end of 2023. Reaching TPI Level 2 requires a company to publicly commit to reducing GHG emissions and report on its scope 1 and 2 GHG emissions.
Over the next three years, our investment team engaged with nearly every company in our portfolios that were either TPI Level 0 or 1. For example, in 2022 alone we engaged over 50% of our holdings on the issue. Fortunately, we were rewarded with gradual progress. As of end of 2023, nearly 80% of our portfolio companies were reporting scope 1 and 2 emissions. We have not been able to find recent, directly comparable data to benchmark this performance, but MSCI found in 2022 that only about 40% of the MSCI ACWI index constituents reported scope 1 and 2 emissions. While we did not reach target of 100%, we are pleased to see such a strong improvement.
Figure 1: Number of portfolio companies at each TPI Level 0 to 4. Source: Arisaig analysis of portfolio companies’ annual and ESG reports
Armed with an almost full set of disclosures, we were curious to understand how much they differed from the data provided to us by our third-party providers. We compared the GHG emissions reported by the portfolio companies in 2023 with the latest GHG emissions data available for those companies from the data providers as of December 2023. We found that:
- We cannot rely on the data providers to reliably reflect the latest disclosures made by our portfolio companies. For 50% of our portfolio companies that reported scope 1 & 2 emissions in 2023, Data Provider 1 either had no emissions data or provided estimated data instead of extracting reported data. This was the case for 21% of the companies for Data Provider 2.
- The figures provided by the data providers can be wildly different to actual disclosures. We calculated the percentage deviation of the data providers’ data and the actual disclosures made by the companies. In terms of absolute emissions, on average, for Data Provider 1, the scope 1 emissions were more than 24 times higher than the actual reported emissions. This average was heavily skewed by just one company (an Indian FMCG business), for which the data provider’s emissions were c. 700 times too high. Data Provider 2’s scope 1 emissions were more accurate, but still on average about 1.5 times higher than actual reported emissions. For both data providers, scope 2 emissions more closely resembled the reported data than scope 1.
- Data providers are unlikely to interrogate disclosures directly with companies. We noticed when manually collecting the emissions data direct from companies’ annual and ESG reports that one of our portfolio companies reported a very large, negative figure for its scope 1 emissions. When we emailed the company about it, the company responded within 24 hours to admit that this was a mistake and provided us with the correct figures. Neither of the data providers seem to have picked up on this clearly erroneous reporting: Data Provider 1 used its own estimates, and Data Provider 2 simply reported the figure included in the annual report.
This analysis indicates we should consider re-baselining our net zero targets as the original baselines for 2019 were likely based on inaccurate data. While only a handful of our portfolio companies’ reported emissions are externally audited, we still think they are likely to be more reliable than the opaque estimation methodologies of data providers, particularly when it comes to off-index emerging market companies. It also confirms that our engagement efforts with the portfolio companies over the past three years to get them to measure and report have been worthwhile. We are conscious that there is still 20% of our portfolio that have yet to reach TPI Level 2. We will continue to engage with them and hope to hit that 100% target as soon as we can. Finally, the analysis hints at the challenges we will soon face when integrating scope 3 emissions (which are more challenging for companies to measure) into our targets.
