Schroders and GIC bolster climate portfolio analysis with strategic research collaboration on Avoided Emissions framework

30/11/2021
Singapore

Schroders, in collaboration with Singapore's sovereign wealth fund GIC, has published a joint research paper, detailing how an Avoided Emissions framework can complement conventional carbon metrics in investment and portfolio analysis.

Climate change will be a defining investment theme for the coming decades.  As governments’ and societies’ decarbonisation commitments translate into tangible policies and actions, giving rise to winners and losers in the green transition, the importance of meaningful and comprehensive carbon measures is higher than ever. Yet investors currently lack a robust framework to systematically assess the opportunities this transition will bring, and the impact it will have on their portfolios.

Conventional Scope 1, 2 and 3 measures focus on the emissions companies generate from their own operations and their value chains. However, leaders in the decarbonisation race are doing more than reducing their own emissions; they are developing products and services that can drive significant reductions in economy-wide emissions outside of their own value chains, which are not captured in these conventional carbon measures.  This underscores the importance of analysing Avoided Emissions to identify these market shifts and opportunities in a low carbon future.

The Avoided Emissions framework aims to quantify the emissions saved through the substitution of high carbon activities with low carbon alternatives. These savings – relative to a baseline where these technologies are not employed – represent real emissions reductions, and will be vital to global decarbonisation efforts. 

For institutional investors, the implications of the multi-decade climate transition are immense. The framework is built with the objective of direct application to investment analysis, sharpening managers’ abilities to identify and assess an extended set of winners from the green transition. It is a pivotal step forward by enabling a more integrated and holistic analysis of climate risks and opportunities at the portfolio level, providing ease of comparison with Scope 1, 2 and 3 emissions under a common unit of measurement.

Andy Howard, lead author and Global Head of Sustainable Investments, Schroders, commented:

”The framework is based on a proprietary systematic value chain approach to capture the contribution of a broad set of industries and activities to Avoided Emissions. We believe that this innovative framework, with its emphasis on investability and scalability, presents a significant advancement from common approaches to carbon footprint and exposure analysis. It underpins our longstanding focus on and work in understanding the investment implications from the low carbon transition.

We hope that this collaborative effort will not only accentuate the importance of this under-researched topic, but also pave the way to more holistic climate accounting that provides a complete view of business models’ carbon exposures.”

Rachel Teo, co-author and Head of Futures Unit and Senior Vice President, Economics & Investment Strategy, GIC, commented:

 “Building robust tools and models to integrate climate-related risks and opportunities into investment processes is a key focus of our climate research work at GIC. The Avoided Emissions framework enables long-term investors like us to better identify and potentially align our portfolio with the opportunities presented by the low carbon transition.

Given that this is an increasingly important topic, the collaboration is just the first step and we look forward to expanding the analysis. This includes accounting for regional and industry differences, as well as extending coverage to private markets and more carbon-avoiding activities as technologies mature.”

Johanna Kyrklund, Group Chief Investment Officer, Schroders, commented:

“The worldwide impetus to net zero is catalysing innovations, technologies and in turn investment opportunities that will re-define portfolio strategies for the long term.

Avoided Emissions is no longer just a concept; affirming the value of this research, we have already put the Avoided Emissions framework to work, integrating this into our proprietary tool SustainEx, which measures a portfolio’s overall environmental and social contribution. This is an important extension of our investment analysis toolkit, and positions Schroders ahead in identifying and capitalising on the potential winners from the shift to a low carbon economy, whilst seeking to avoid the losers, benefitting our clients’ portfolios in the long term.”

Kevin Bong, Director, Economics & Investment Strategy, GIC, commented:

“Investors need to fully consider the causes and effects of climate change on our portfolios, and prepare and participate in the multi-decade carbon transition that will likely entail a rewiring of the modern economy.

Avoided Emissions introduce a new and important dimension to a growing set of metrics that investors and policymakers need to make better decisions. This helps investors like GIC better identify companies that are likely to be winners in the ongoing carbon transition. One key feature we are excited by is the ease of integration across conventional Scope 1, 2 and 3 emissions data to enable a more consolidated and holistic view of our investment portfolio.”

The full report is available for download here.

Schroders is a world-class asset manager operating from 37 locations across Europe, the Americas, Asia, the Middle East and Africa.

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