Macro Minutes: The Challenges of Measuring Carbon Emissions

Title screen appears, “The Challenges of Measuring Carbon Emissions” Underneath the title is the picture of the presenter Nurul Bachik.

A woman appears on the right down corner of the screen wearing Hijab and Arabic style clothing, setting in an office. She begins to speak.

A banner identifies her as Nurul Bachik, Fisher Investment Portfolio Analyst on behalf of Fisher Investments and its affiliates.

Nurul Bachik: Institutional investors globally are increasingly aware of carbon considerations, whether they have explicit carbon targets for their portfolios or are simply seeking to understand how to incorporate carbon considerations into their investment process.

Nurul Bachik: Well, there are many ways to approach this. In truth, no one way is precise. Welcome to Fisher Investments macro minutes presentation on the challenges of measuring carbon emissions. My name is Nurl Bachik and I'm a portfolio analyst in our institutional group.

Nurul Bachik: Today, I'm going to discuss the various methodological challenges that institutional investor may face when quantifying carbon emissions and suggest a more comprehensive approach to carbon management.

On the screen a chart appears, the chart is titled “Why is Measuring Carbon Emissions Important?” underneath the title is the following comment:” it is Becoming increasingly Common to see companies in major indexes make a commitment to measuring and reducing their carbon emissions. For institutional investors interested in managing their portfolio’s carbon footprint, having a solid understanding of how carbon emissions are calculated is key.”

The chart is showing percent of companies with carbon emissions reduction target.

Nurul Bachik: It is becoming increasingly common to see companies in major indexes make a commitment to measuring and reducing their carbon emissions. For institutional investors interested in managing their portfolio's carbon footprint, having a solid understanding of how carbon emissions are calculated is key.

Nurul Bachik: However, quantifying carbon emissions is not simple and are various metrics with deferring methodologies for accounting and disclosures. How one defines the scope of measurement will influence how small or large the carbon emission is for a company.

On the screen a table appears, the table is titled “Measures of carbon Emissions” underneath it the following comment” the Greenhouse gas protocol (GHG Protocol) is one of the most widely used emissions reporting standards – it requires companies to measure their emissions in three categories, or scopes.”

Nurul Bachik: : So, what is the standard definition of measuring carbon emissions? According to the Greenhouse Gas GHG protocol, the most commonly used international carbon accounting framework, there are three groups of carbon emissions, also referred to as scope of carbon emissions.

Nurul Bachik: Scope, one refers to direct carbon emissions from sources owned or controlled by the company. This includes onsite combustion such as gas, boilers or vehicles. Scope two refers to indirect carbon emissions from electricity purchased and used by the company, for example, combustion occurring from electricity purchased to power, computers, heating and cooling.

Nurul Bachik: Lastly, scope three refers to all other indirect carbon emissions from sources that the company do not own or control. This includes an array of indirect emissions resulting from activities such as business travel, distribution of products from by third parties, and downstream use of a company's products.

Nurul Bachik: It is clear by definition that the broadest measure of emissions is scope three, as it includes the complete supply chain bigger than the other two scopes combined.

On the screen a DATAGRID appears, the title is “Challenges of Measuring Carbon Emissions” underneath it is the comment “Though a reporting framework on how to measure carbon emissions exists, these stricter divisions of scopes may divide emissions and activities in somewhat arbitrary ways. For example, companies with similar business models can have differing emissions profile that overlap with each other.

Nurul Bachik: The reporting framework on how to measure carbon emissions exists. These stricter divisions of scopes may divide emissions and activities in somewhat arbitrary ways. Apple and Samsung are both companies that design, manufacture and sell smartphones, personal computers and other personal electronic devices.

Nurul Bachik: So, one might expect that Apple and Samsung to have similar proportions of scope one, two and three carbon emissions. However, Apple has almost all of its emissions 99% in scope three rather than in scope one and two, whereas Samsung only has 51% of its emission in scope three. This is because Apple outsources much of its manufacturing, so it has a significantly higher proportion of its emissions in scope three. Apple even outsources some of its manufacturing to Samsung.

Nurul Bachik: So, there is some overlap between Samsung scope one and two with Apple's scope three emissions. Therefore, an investor that holds both of these companies and conducts a comprehensive calculation as it is defined by Dag's framework, the same emissions would be counted twice. This is one example of how limiting using the scopes can be in measuring carbon emissions for companies with similar business models, especially when aggregated for portfolio level analysis.

On the screen 2 new chart appears, the charts are titled “challenges of measuring carbon Emissions” underneath it the following comment “as Currently defined, scope 3 measures have lower Utility due to lower reporting coverage and difficulties in producing accurate estimates.

Nurul Bachik: Taking this a step further, let's look at the challenges within scope three emissions. Specifically, as it is currently defined, scope three measures have lower utility due to lower reporting coverage and difficulties in producing accurate estimates. Given the wider scope, there are a number of barriers that make capturing and evaluating the data challenging. The left chart show while the number of companies reporting scope three has improved in recent years, the majority of the indexes still fall below 75% of reporting coverage relative to scope one and two emissions.

The charts are showing scope 3 lacks reporting coverage and wide variation in estimates.

Nurul Bachik: Companies in emerging markets trail behind even further on all scopes of carbon emissions reporting. As a result, most of the coverage still relies on model estimates. Unfortunately, in an effort to make progress towards tracking scope three emissions, there is a large deviation between estimated and reported data.

Nurul Bachik: On average, there is a large gap difference among the companies in major indexes as shown on the right chart. As a result, scope three measures seem to be of low value for asset managers and or asset owners to utilize in calculating emissions

On the screen a spreadsheet appears, the title is “A comprehensive & holistic approach to considering Carbon” underneath it the comment “Even though there are challenges in measuring Carbon Emissions are accounted for. One way to do this is to not be restricted by ‘scopes’ and consider a more comprehensive and holistic approach”

Nurul Bachik: given the various challenges investors face when measuring carbon emissions. In our view, if this objective is important to you, a holistic approach inclusive of other tactics may help you reach your goal. Relying on the scopes alone may ultimately fall short, but a combined effort serves as a catchall strategy where the majority of material sources of emissions can be accounted for.

Nurul Bachik: In addition to utilizing scope one, two and three measures, we suggest looking at other metrics like power generation or revenue derived from thermal coal, as these two metrics represent carbon emissions from upstream and downstream company activities. Similarly, active and frequent due diligence through engagement and proxy voting should also help. This allows for regular monitoring of portfolios for potential carbon related issues.

Nurul Bachik: In our view, this comprehensive and holistic approach in carbon management both addresses the challenges face when it comes to measuring carbon emission and maximizes the likelihood of improving environmental conditions worldwide.

A white screen appears with the following written text” Thank you for watching. If you'd like to learn more about our views, please reach out to your relationship manager or Email FisherInstitutional@fi.com”

Nurul Bachik: Thank you for watching. If you'd like to learn more about our views, please reach out to your relationship manager.

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