Over the past years, the finance community has become a growing consumer of companies’ carbon information – both at the corporate level and, increasingly, at the level of products and services. Why is such CO2 data relevant to investors and banks?
The immediate answer is to point out that “They have to consider it”. Indeed, financial regulation is greenifying: over 100 of the world’s central banks are part of the Network for Greening of the Financial System (NGFS), which seeks to incorporate climate aspects into the regulatory toolkit.
But this is only part of the answer. It is also increasingly being seen as good business sense to consider climate topics in one’s investment and lending decisions.
A couple of financial market applications are worth highlighting to illustrate this point:
- “All information on the table”: Holistic risk assessments
Financial institutions conducting holistic risk assessments seek to incorporate all relevant data that can influence the risk profile of a company’s product suite.
In this regard product-based carbon data can help an investor assess a firm’s exposure to transition risk – looking at the current and likely future product mix of a company. As we move towards a carbon-neutral economy, are companies able to shift their “legacy” goods towards greener alternatives?
Who will be most likely to be hit by shifting consumer preferences and evolving regulatory standards for their products (such as last year’s ESPR in the EU). Similarly, what firms may be required to spend (significant) amounts of capex to upgrade their products to these evolving expectations?
There can be a major difference between the transition risk leaders and laggards in any sector. And while these changes are typically assessed from a 5 year+ time horizon, they can occur suddenly and erratically.
- “Pink glasses”: Assessing green business opportunities
Financial institutions assessing cash flows and growth potential can also benefit from data on a product’s climate and broader environmental impact.
If your “widget” is seen to be a climate leader, it is likely to win market share over time. Those firms most effective at integrating low carbon processes throughout a product’s value chain should, in this transitional phase, win market share from the laggards. Carbon data also allows for such assessments: which companies will likely gain more clients? Who is less likely to be subject to regulatory scrutiny?
- “Follow the money”: Impact assessments
There is also a growing group of investors that seek to measure the impact of their portfolio. What carbon emissions are they generating? How much emissions avoidance have they contributed towards? This allows them to market to environmentally conscious clients the impact of every $ that is placed in a specific fund.
For them comparable product-level carbon data allows for the calculation of “green alpha”: a granular project-level assessment of environmental returns on top of the financial returns. It also provides tangible case studies of the types of next generation green inventions that they have supported.
- “Ancillary opportunities”: Green finance
Product carbon disclosure can also help a firm unlock different types of sustainable financing instruments. This can also be appealing for investors and banks seeking to grow their portfolio of such instruments.
Debt instruments such as green loans and bonds can be used to finance projects that seek to decarbonise particular products and services. They require a firm to report back the “before and after”: what have been the avoided emissions of such projects? I.E. My factory used to generate XX KG of CO2 emissions per good, which has gone down to YY KG post the improvements made.
These are just four of the many financial use cases of generating rich, actionable product-level climate information. CFOs are hence likely to take notice! Therefore, when enriching your CO2 intelligence, do make sure your finance function is aware.
This article was previously published by SusVal as a guest author on Ecochain: https://ecochain.com/blog/carbon-data-bankability-financial-institutions