Irish pension trustees should be “cautious” of the data included when building low-carbon portfolios with their asset managers, according to an expert.

Speaking at the Irish Association of Pension Fund’s (IAPF) Spring Conference yesterday, 23 March, which was held online, Insight Investment integrated solutions credit portfolio manager, Claire Bews, explained that carbon measurements can be split into scope 1, 2 and 3 numbers and it is important that scope 3 numbers are included when building a portfolio.

There are two measures that are widely used in the industry that are recommended by the Taskforce on Climate-Related Financial Disclosures (TCFD). The first is the weighted average carbon intensity (WACI) and the second involves measuring carbon footprints.

“Carbon intensity of an issuer is calculated as the tonnes of CO2 equivalence, so the tonnes of greenhouse gases that are admitted by the issuer per million dollars of sales. Carbon intensity normalises for company size but not between sectors, so you would expect that cement companies, utilities and energy companies all have relatively high carbon intensities versus other sectors.

“Carbon footprint… attempts to measure the carbon emissions owned by the portfolio.”

More importantly, she said that investors, when shown these measures, should ask whether they use scope 1 and 2 numbers or scope 1,2, and 3 numbers. Scope 1 emissions are the emissions that are issued directly by an issuer from their boilers or their company vehicles, for example; scope 2 emissions are indirect emissions from purchased electricity and steam, and scope 3 emissions are all the other emissions from up and down the value chain.

“Scope 3 emissions are big; they make up about 70 per cent of total emissions and they are also quite difficult to estimate so there is a lot of assumptions that go into estimating scope 3 numbers. The difficulty in estimating those scope 3 numbers has meant that historically companies have been quite slow to report scope 3 numbers, so we’ve got a lot better coverage of scope 1 and 2 numbers than we have of scope 3 numbers.”

Bews noted that in the Euro aggregate index about 97 per cent of the issuers report scope 1 and 2 numbers but only 76 per cent of issuers report scope 3 numbers. Because of this lack of coverage, Insight Investment has found that some of its clients are focusing only on scope 1 and 2 numbers and just using scope 1 and 2 numbers to build low-carbon portfolios. However, Bews cautions against this, as this could lead to “unintended consequences”.

She highlighted that incorporating scope 3 numbers into WACI measurements has a significant impact on the carbon results.

“The message is that you need to be very cautious when you are building low-carbon portfolios using just scope 1 and 2 numbers because in reality you might have a rather unpleasant surprise when scope 3 numbers are incorporated, and having gone through a decarbonisation process in your portfolio you may find that you have to go through it again.”

However, she acknowledged that there has been pressure in the industry to decarbonise portfolios now, regardless of whether there is scope 3 data or not. She said that they are often asked the question of whether this can be done while maintaining returns.

“We’ve done some work on this and found that it is possible to decarbonise portfolios without harming returns up to a point.”

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