ESG Data Guide 2024

The financial sector needs more granular and accurate climate and biodiversity data

Environmental Finance: Why is it important to have specialist data providers when dealing with climate and biodiversity?

Virginie Wauquiez: The demands of regulators, supervisors and investors have increased considerably in recent years, leading financial players to give priority to the most scientifically robust approaches and access to the most granular data.

Aggregate ESG ratings have shown their  limitations, since they mix measures of different nature for an aggregate result that is difficult to interpret. Hence the need to get specific assessments on climate transition risk, physical risks, or biodiversity impact and dependencies.

The financial sector is therefore currently facing two challenges:

  • Measure what really matters: each sector has its own role to play.

The same metrics or methodology cannot be used to measure the climate risk of a food company or an oil and gas company.

Furthermore, certain sectors such as ICT (4% of global GHG emissions) have long been underestimated. At Carbon4 Finance, we have developed over 75 different sector modules for measuring transition risks for corporate bonds, equities and loans, as well as sovereign and green instruments, with relevant scenarios, metrics and targets, while ensuring consistency and comparability of methodologies.

  • Critically review and remodel the data reported by companies Scope 3 emissions represent more than 80% of total GHG emissions, but only 45% of listed companies disclose it, and only 20% cover the most material categories. Some regulations (e.g. the CSRD) will facilitate access to reported data, but will not impose a minimum coverage for significant emission items, thus not guaranteeing the comparability of companies, even within the same sector. This is why we are systemically recalculating emissions and comparing them with reported emissions.

EF: What is the Carbon4 Finance differentiating factor highlighted by your customers?

VW: In addition to the accuracy and robustness of our scientific approach, our clients particularly appreciate the transparency and support we provide.

Financial institutions must comply with demanding regulatory requirements and assume their share of responsibility for climate mitigation and adaptation, or the protection of natural capital. All decision-making must be transparent and robust. At Carbon4 Finance, all our methodologies are openly available on our public website. Our clients have direct and unlimited access to the research team and sector experts, and our platform easily provides additional information to explain the data, its construction or the specific challenges and levers for each sector. This is one of our key strengths and one that many of our long-standing customers have been emphasising for the past eight years.

EF: How has your expertise been built up and what is the role of innovation and research?

VW: The Carbone 4 group was founded 17 years ago by Alain Grandjean and Jean-Marc Jancovici, the latter being at the origin of the first carbon footprint methodology in 2000 which inspired the GHG Protocol. 

Over the past 17 years, the group has distinguished itself as an innovative leader in environmental issues through:

  • carrying out thousands of carbon footprint assessments and developed a proprietary emission factors library;
  • advising hundreds of companies and countries on their climate and biodiversity strategies;
  • creating recognised open-source methodologies such as the Net Zero Initiative in partnership with the World Business Council Sustainable Development; and,
  • launching new collaborative initiatives such as IF which aims to develop new forward-looking scenarios that take into account the planet’s limits (raw materials, metals, land, competing uses). Carbon4 Finance harnesses all this expertise within its three databases on climate transition risk, physical risks and biodiversity assessment. For example, we are able to recalculate induced and avoided, Scope 1, 2 and 3 emissions for more than 42,000 entities. Research and innovation are in the group’s DNA, and we are constantly investing in the development of new methodologies and the improvement of our existing ones.

EF: How do you measure avoided emissions, sometimes called ‘Scope 4’ and why are they important?

VW: Avoided emissions are a key aspect of our analysis, which we have included in our assessment methods since 2016.

Avoided emissions refer to the “positive” contribution a solution may provide to the climate mitigation when comparing the GHG impact of a solution to a reference situation or scenario. For example, avoided emissions can be attributed to a manufacturer of insulation that will help reduce the energy used to heat or cool buildings, or a manufacturer of electric bicycles that will enable a mode shift from thermal cars to bicycles.

Assessing a company’s climate performance on the basis of its induced emissions alone is simplistic and does not encompass all the aspects of the transition. This is why our transition risk rating takes into account this metric, as well as a dynamic analysis of the past, present and future performances, including a critical review of any transition plan, to provide a holistic view of its transition risks and impacts.

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