Getting granular with sustainability data
ISS STOXX is seeing demand among investors for a more granular understanding of the net zero transition and nature-related risks – and is investing in its data products in response. Candice Coppere explains
Environmental Finance: At ISS STOXX, you’ve substantially enhanced your Net Zero Solutions. Can you explain the thinking behind the enhancements?
Candice Coppere: Our Net Zero Solution assesses the commitment of issuers moving towards the transition to a lower-carbon economy. It looks at emissions disclosures, 2050 net zero commitments, scopes covered, as well as the issuer’s decarbonisation strategy.
We’ve increased the size of the universe covered, from around 2,600 companies globally to more than 8,000, and we’ve also added considerable granularity to some of the data points. For example, we’ve made our Scope 3 materiality assessment a lot more detailed, going down to the sub-sector level, and we are providing more information about decarbonisation levers. We have also added data points around acknowledging the need for a just transition, and whether offsets are used as part of the issuer’s commitment – which is not recommended, in the context of net zero.
The goal is to really increase transparency: investors are shifting from simply asking if there is a decarbonisation strategy to really trying to understand that strategy and whether it is credible or not.
EF: Can you outline how your data assesses issuers’ credibility around net zero?
CC: Our Net Zero solution recent release is a great step towards increased transparency and granularity but it is also the foundation for enhancements that we are working on, to provide clearer signals on the ambition of issuers’ targets and the credibility of their transition plans.
We have also revamped recently our scenario alignment tools and released a dataset that tracks past emissions performance against companies’ stated emissions targets. It’s good to have ambitious targets, but when we look at how companies are faring, it’s often another story. Both our emissions performance tracking and scenario alignment data helps to provide context around the ambition and the credibility of those targets.
Performance tracking data helps to identify issuers that are consistently missing their announced targets over time. Scenario alignment data provides a forward-looking perspective. It helps users to understand if emissions under a target projections assumptions are ‘credible’ compared with a historical trajectory and, if under announced commitments, the level of targets set are ambitious, by checking the overall alignment with a 1.5ºC scenario from a cumulative perspective.
This latter element is important. The carbon budgets that will allow us to remain below 1.5ºC of warming are not infinite, so an issuer’s emissions pathway is important. The closer we get to 2050 and net zero, there becomes a point where an issuer which has been overshooting too much can’t catch back up. This analysis helps to put commitments into perspective.
EF: How are investors using the Net Zero Solutions data, especially in the context of transition?
CC: They are using it to better understand which companies are progressing in the transition, which have the most credible targets, and thus how to manage transition risk exposures. At the end of the day, net zero is not just about decarbonising a portfolio, but it’s also about making sure capital is reallocated to the issuers who are transitioning their business models. Following the Institutional Investors Group on Climate Change’s Net Zero Investment Framework, we provide an assessment of whether an issuer is not aligned, committed to aligning, or is aligning. We provide the granularity to allow investors to understand what is needed for an issuer to move from one stage to another – it’s very useful for engagement.
EF: What would you say differentiates that data set from others in the market?
CC: First, the coverage. Second, the increased granularity and transparency. We provide our assessment of alignment, but we also provide the underlying metrics that feed into this alignment, which allows investors to understand what drives it and, potentially, to apply their own view as well, if they disagree with any aspects of our approach.
EF: What other trends are you seeing in terms of evolving demand for climate-related risk data?
CC: We are seeing a growing number of investors who are looking to better understand sub-sovereign climate exposures. In many countries, the level of emissions associated with a sub-sovereign issuer – such as a state or province – can be very different compared with the sovereign, or with a different state. For example, in states where mining or oil and gas extraction are significant, emissions are much higher than states whose economies are dominated by services.
We have been working intensively to expand our coverage of sub-sovereign entities, starting with countries like Australia and Canada, and expanding to some European countries, to provide more granularity here. We will soon be releasing an enhancement to our platform to allow investors with specific sovereign and sub-sovereign fixed income portfolios to run full climate risk assessments, covering carbon footprints, scenario alignment, and transition risk metrics.
EF: What about nature risk data? How is your offering evolving?
CC: Our Biodiversity Impact Assessment Tool (BIAT) covers around 18,000 issuers and quantifies the potential impact of corporate activities on biodiversity, based on a life-cycle impact assessment methodology. Conveying biodiversity loss with both potentially disappeared fractions of species (PDF) and mean species abundance (MSA) metrics, the BIAT is complemented by an ecosystem services dependency assessment, which enables investors to understand the impact and dependency risk exposure of investments.
We’re seeing growing interest among investors currently in leveraging geospatial tools. From the perspective of nature, the location of assets is fundamental – the TNFD ‘LEAP’ approach starts with ‘locate’. We’ve had feedback from some of our clients that some of the large asset-level databases they have been using are of varying quality, with asset locations that are outdated or that are otherwise not correct. Investors are emphasising the need for databases that prioritise quality over quantity, and we are investing heavily in the collection of accurate corporate asset data – this is quite strategic for us.
Candice Coppere is head of the Climate and Nature Innovation Lab at ISS STOXX, based in Berlin.
For more information on Net Zero Solutions at ISS STOXX, click here.
