Abstract
This paper points to several carbon footprint data distortions that overallocate carbon footprints to individual companies, and to several carbon data intricacies that lead to improved data integrity. Data distortion due to the same company being listed in multiple geographical jurisdictions or through different share classes overstates Emissions Scope 1 by 4.6%, Emissions Scope 2 by 5.5%, Emissions Scope 3 by 10.6% and Reserves by 6.0%. Data distortion due to index construction by having different market capitalization in representative indices overallocates Emissions Scope 1 by 33.9%, Emissions Scope 2 by 27.6%, Emissions Scope 3 by 21.3% and Reserves by 57.2%. A significant amount of carbon data is not precise but is estimated by third-party providers through proprietary techniques. The estimated data for Scope 1 Emissions is 46.4% for the companies in the index. In addition, carbon data is stale, resulting in 94.5% of data being two years old or more. Usage of carbon data in a present format may incorrectly remove some companies from portfolios (negative screen, complete removal) or incorrectly reduce some companies’ weight in a portfolio (partial screen, fractional removal).
Highlights
The methodology for calculating carbon footprints and understanding how carbon footprint affects portfolio construction and valuation is challenging on several levels
This paper proposes that a corporation’s carbon footprint should be assessed based on combining total market capitalization from various geographical listings and/or share classes in the MSCI ACWI index and allocating carbon footprint proportionally
On average 1.6% of companies were double or triple listed; the Emissions Scope 1, and 3 and Reserves were overestimated by 4.6%, 5.5%, 10.6% and 6% respectively
Summary
The methodology for calculating carbon footprints and understanding how carbon footprint affects portfolio construction and valuation is challenging on several levels. The tasks include data classification, reporting, sources, timing and attribution. Understanding the intricacies of carbon footprint data is critical because carbon data is not reported in financial statements, nor is it required by financial regulators. When carbon data is provided, it is provided by the companies directly or is estimated by third parties, while in some instances it is not provided at all. Carbon data is non-standardized, unlike financial data under GAAP, and the quality of data is mixed. This research aims to address some of these carbon data issues
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