Solving the Data Problem in Decarbonization

Image credit: iStockphoto/ESOlex

Data is one issue that probably won’t get as much airtime as it should at the COP26 Summit in Glasgow this month.

Global statesmen and women, and technocrats will be busily discussing emissions reduction targets and carbon trading. But they would also do well to talk about how essential data will be in helping the world decarbonize.

The financial industry, for example, is very much to the fore of this debate, with fund managers and bankers embracing the idea of Environmental Social and Governance (ESG) based investing. However, many of them are making the cry that they lack the data and the analysis tools for optimal execution.

It’s the old argument that you can’t act on something if you can’t measure and quantify. 

Real-time data

A recent survey of corporate by the Diligent Corporation found that while most acknowledged that the integration of ongoing, real-time data is key to meeting ESG commitments, only 9% of them were actively using software to support data collection and analysis comprehensively.

As Matt DiGuiseppe, the vice president of research and ESG at Diligent Corporation, said, the foundations of a strong ESG program are built on data. Another 30% were using data in some aspect for ESG, while 61% were not doing so.

This refers to scope 1 and 2 emissions and not scope 3 emissions from the extended supply chain. These account for more than 70% of the carbon footprint of many businesses, so understanding these through data presents a long-term project for many organizations.

“An organization that is able to fully integrate ESG into corporate strategy, with a symbiotic relationship between day-to-day business and ESG goals, will find itself in a much better position than its peers,” he wrote.

“Reporting, ultimately, should be a by-product of an ESG program where real-time data is integrated into decision making on a continuous, ongoing basis. The alternative — reporting either annually or biannually, attempting to amalgamate data from a variety of disparate sources in a short time period — is more difficult and much more susceptible to error and risk.”

The good news is that some players are making some impressive moves. Global rating agency Moody’s, for example, has a Climate on Demand scoring tool which enables investors to assess climate risk exposure in investment projects.

The tool provides a forward-looking view on assets' exposure to physical climate risks, including floods, heat stress, hurricanes and typhoons, sea-level rise, water stress, and wildfires.

It can score exposure to climate hazards out to the 2030-2040 decade for any location in the world. It also allows users to examine specific risk drivers and explore the underlying indicators, capturing various dimensions of risk for each hazard.

Users of the tool include investors such as the Private Infrastructure Development Group (PIDG), which will use Moody’s solution to screen potential new investments for exposure to climate hazards, focusing on sub-Saharan Africa and South-East Asia, where it has projects.

SaaS model

Unsurprisingly, there are new solutions out there in the world of startups too.

In Australia, a new company called Emmi — a riff on the word emissions, is using data science and machine learning to model the impact of climate change on 50,000 global stocks.

What started as a ‘passion project’ for founder Michael Lebbon four years ago is now a commercial product he hopes to market at scale to global asset managers next year.

Lebbon, by his admission, has spent the last 15 years in carbon markets, driven by the belief that it could be the ‘biggest lever we could pull for solving climate change.’

Emmi operates on a ‘software as a service model’ and is an analytical tool covering around 50,000 globally listed stocks. Around 30 Australian asset managers and some corporates are already using the solution.

Using Emmi, asset managers can look at a company’s current position and understand the financial impact of living in a world with 1.5-, 2- or 4-degree warming.

Lebbon says where Emmi is different is that it is data-driven, with no qualitative assumptions built-in.

“There are a lot of hypothetical utopian ideas on how we solve climate, and then there are the harsh realities of living in a capitalist system where we need to put a dollar value behind it if you want actual change,” he said.

Lebbon describes Emmi as providing the “Excel-like” capabilities with which asset managers can analyze and add their modeling.

The venture is driven by his conviction that climate risk needs to move from the “thematic to the mainstream” and become an integrated part of all investment decision-making.

“The market knows it has to move, but it doesn’t know how, and that’s where we come in, to help the market understand how it can reposition and get the transition to occur,” said Lebbon.

Lachlan Colquhoun is the Australia and New Zealand correspondent for CDOTrends and DigitalWorkforceTrends, and the editor of NextGen Connectivity. His fascination is with how businesses are reinventing themselves through digital technology and collaborate with others to become completely new organizations. You can reach him at [email protected].

Image credit: iStockphoto/ESOlex