Data and the investment paths to net zero

As the global effort to decarbonise continues, one of the most important goals is to ensure that global warming is limited to below 2 degrees Celsius above pre-industrial levels. Failure to do so would result in the Antarctic ice sheet melting, causing severe issues like flooding, the displacement of coastal populations and the destruction of livelihoods and property.

To help measure the scale of transformation needed, the world relies on a carbon budget – an upper limit of the total greenhouse gas emissions that can be allowed before we hit the ceiling of 2 degrees Celsius warming.

This is usually calculated based on historical cumulative emissions from fossil fuel combustion, land-use change and industrial processes. Due to geopolitical considerations and structural complexities, allocating the carbon budget across countries and sectors is a major challenge.

For investors, analysing an industry’s decarbonisation potential – which includes its commitment to research and development and the availability of technological breakthroughs, among other factors – is equally demanding. Investors must be able to identify sectors, such as electrical utilities, that are capable of decarbonising quickly and cost-efficiently, compared to those that require more time, such as aviation.

One essential tool is environmental, social and governance (ESG) data. Having quality-controlled, rigorously verified data is key to anticipating regulatory changes, managing risks, and – most importantly – spotting the opportunities presented by the global transition to net zero carbon emissions.

COMPLEX CHALLENGES ON THE ROAD TO NET ZERO

Having accurate data is not just key to assessing a country’s progress on carbon emissions, it is at the heart of managing climate change and ensuring the world’s sustainability.

Not all datasets are created equal. Data gathering methods, reporting formats, errors and inconsistency in timelines and scopes can all contribute to differing levels of reliability of the data.

Due to these factors, there is also a carbon information gap – the missing data between the amount of carbon emissions officially reported by a country or sector, and the amount actually emitted. It was estimated that this gap ranges from 8.5 billion to 13.3 billion tonnes a year – a significant quantity that will certainly affect the world’s chances of keeping global warming to below 2 degrees Celsius.

Adding to the overall complexity, technological advances mean that some sectors are making more progress in decarbonisation compared to others. For instance, with the breakthroughs in battery technologies in recent years, the automotive industry is not only producing cleaner cars but also cleaning up its production process and supply chain. Some manufacturers are working steadily towards net zero emissions, with major companies like Mercedes Benz implementing a package of measures along its entire value chain – from technical development and production to service life and recycling – as part of its Ambition 2039 initiative to go fully carbon-neutral.

Sustainable Investing Solutions from FTSE Russell and Refinitiv, both LSEG businesses, help investors understand exposure to climate risks and opportunities. Solutions such as Refinitiv’s carbon data and estimate models can give investors a more accurate snapshot of equity investment opportunities.

For the identification of cross-asset-class climate change investment opportunities, FTSE Russell’s Green Revenues 2.0 data model measures the green revenue exposure of over 16,000 listed companies across 48 emerging and developed markets – a coverage that spans over 98 per cent of the total global equity market capitalisation.

The Green Revenues 2.0 data model offers enhanced granularity and usability, with features such as a green tiering system to assess the level of net environmental impact over seven environmental objectives, and an estimation methodology for companies that do not disclose such data, which is based on additional non-revenue disclosures and modelling of the available data at industry sub-sector level.

Drawing on analytics from its unique analytics, LSEG also provides the effective integration of ESG factors for fixed income investors via Beyond Ratings.

Having comprehensive, reliable and comparable data allows users to better evaluate which companies best fit their investment strategies and portfolio requirements – while at the same time working towards their ESG goals and a more sustainable future for the world.

Learn more about how LSEG can help meet your sustainable finance needs.