Climate Change Science: Part II: Primer and Action Steps for Companies
1 Part II: Company Specific Application
Panelists:
Cynthia Cummis Director of Private Sector Climate Mitigation, World Resources Institute
Dr. Rebecca Thomas Director of Climate Research Solutions, Arabesque
Dr. Todd Arthur Bridges Global Head of Sustainable Investing & ESG Research, Arabesque
Moderator:
Yafit Cohn Vice President, Chief Sustainability Officer, and Group General Counsel, The Travelers Companies Inc. FOR INTERNAL USE ONLY
ARABESQUE S-RAY® Contents VI V. IV. III. II. I. . References and Links Use cases Science Based Targets Initiative What are Investors Asking For? Part I Review GHG GHG Protocol – Practitioner Application Page Page Page Page Page Page 39 32 23 11 4 [ ] What are investors asking for?
4 What information and metrics are investors asking for?
Society for Corporate Governance Benchmarking Survey: Investor Climate Disclosure Priorities, May 2021 A recent survey of approximately 150 public company members of the Society, spanning 11 different industries and market cap sizes (66% large- and mega-cap), revealed that investors request engagement or qualitative and quantitative information on a broad range of climate - related topics. Such requests vary widely and are company-, industry-, and market cap-specific, in addition to investor-specific. At least a majority of respondents’ investors have engaged on or requested information pertaining to these topics or metrics within the past two years: ▪ Board oversight structure, process, governance (78%) ▪ Climate-related risks and opportunities (80%) ▪ Risk identification, evaluation, and mitigation/management processes/action items (55%) ▪ GHG reduction goals (81%) ▪ Scope 1 GHG emissions (66%) ▪ Scope 2 GHG emissions (58%) ▪ Scope 3 GHG emissions (52%) ▪ Strategy (60%) Why are investors asking for this data?
According to Morrow Sodali’s annual “Institutional Investor Survey,” a total of 97% of surveyed investors consider climate change risk as very important or somewhat important in their investment decisions.* In addition, SquareWell Partners noted in its April 2021 report, “The Changing Climate on Investor Behavior” that investors themselves are facing an increased amount of public pressure and are being held accountable by climate conscious clients to disclose the impact their investment portfolios have on climate change.**
All of the investors surveyed by Morrow Sodali said they review their portfolio companies’ climate-related disclosures. These disclosures reportedly provide important insights into a company’s processes and thinking about what they identify as material risks, how they go about collecting data, how they manage these risks, and which ESG framework they use to report them.
From Morrow Sodali’s discussions with investors, the majority don’t require more information, but rather want to be provided with better quality climate-related information. The top two improvements investors are seeking from climate-related disclosures are clear connections to financial risks/opportunities (61%) and time horizons in relation to impact on strategy (56%). Disclosure of metrics, targets and achievements is also among the top three at 31%.
* Morrow Sodali annual Institutional Investor Survey of 42 global institutional investors (80%) and pension funds/asset owners (20%) managing approximately USD 29 trillion in AUM ** SquareWell Partners’ report analyzed 30 of the world’s largest asset managers’ voting and investment policies and engagement activity around climate change. What are investors’ preferred reporting frameworks?
Morrow Sodali Annual Institutional Investor Survey, May 2021
Results indicated no consensus among investors on any particular standard or framework; however, TCFD was overwhelmingly the most popular ESG reporting framework, followed by SASB, and then in-house proprietary frameworks focused on material topics. What are companies doing?
Society for Corporate Governance 2021 Sustainability Practices Benchmarking Survey*
Nearly 78% of respondents said their company publicly discloses environmental and social goals, metrics, and/or other information.
Of those: ▪ 64% include disclosure on GHG emissions; 40% include disclosure on climate strategy; and 52% disclose general environmental impacts. ▪ Nearly 77% disclose their environmental and social goals, metrics, and/or other information in a sustainability/CSR report and 65% disclose such information on their website. ▪ 47% disclose the information in their proxy statement; 23% disclose the information in their Form 10-K; and 17% disclose the information in their Annual Report. ▪ Nearly 26% reported some third-party assurance of their sustainability report or separate environmental and social metrics; 4% reported assurance on all of their metrics.
* Survey of Society members conducted January – February 2021, representing 123 respondents across industries composed of 50% large- and mega-cap | 33% mid-cap | 16% small- and micro-cap What are companies doing?
A “Climate Disclosure Questionnaire” of 84 Society members (51% large- mega-cap | 33% mid-cap) in August 2019 revealed companies using a variety of frameworks/standards: How the frameworks and standards align with GHG Protocol
Emission Data Standards Reporting Frameworks & Standards Regulatory Disclosures
GHG Inventory standards and guidance Voluntary reporting standards and frameworks
• Scope 1 • TCFD • EU Taxonomy • Scope 2 • SASB • SFDR • Scope 3 • GRI • NFRD CFRD • Kyoto Gases • IR • Article 173 • 25+ Additional KPIs • CDSB / CDP • 500+ Additional Provisions & Laws The GHG Protocol
11 Organizational Operational Tracking Calculating Introduction Principles Reporting Review Boundaries Boundaries Over time Emissions stakeholder stakeholder partnership of businesses, NGOs, - relate relate to a company's activities World Resources Resources World Institute and WBCSD Multi governments and others The GHG categorizes emissions based on howdirectly they The Greenhouse The Greenhouse Gas Protocol was launched in1998 by • • • The Greenhouse Gas Protocol Introduction
GHG Protocol flagship publications Principles Organizational
Entity Product Project Boundaries
Operational
Boundaries
Over Over time
Tracking
Calculating Emissions
Value Chain
Corporate Project Reporting (scope 3) Product Standard Protocol
Standard Review
A Corporate Accounting and Reporting Standard Introduction
Business Value of GHG Inventory Principles
Organizational Boundaries • Management of GHG risks and identification of reduction
opportunities
Operational Boundaries
• Public reporting and participation in voluntary GHG programs
Over Over time Tracking • Participation in mandatory GHG reporting programs and GHG
markets
Calculating Emissions
• Recognition for early voluntary action
Reporting Review
A Corporate Accounting and Reporting Standard Introduction
Scopes in Corporate Reporting Principles
Scope 1 – Direct emissions on site (e.g., on- Organizational
site energy use) Boundaries
Scope 2 – Emissions from purchased Operational electricity, heat steam, water Boundaries
Scope 3 – All other indirect emissions along
the value chain
Over Over time Tracking
Note: All companies must complete at least a scope 3
screening for all relevant categories. If scope 3 is over Calculating 40% of total emissions, an emissions inventory must Emissions
be provided (estimations at minimum).
Reporting Review
A Corporate Accounting and Reporting Standard Introduction
Scopes in Corporate Reporting Principles
2. GHG Accounting and Reporting Principles Organizational Boundaries
3. Setting Organizational Boundaries
Operational Boundaries
4. Setting Operational Boundaries
over over time Tracking
5. Tracking Emissions Over Time Calculating 6. Identifying and Calculating Emissions Emissions
7. Reporting GHG Emissions Reporting
8. Review Review
A Corporate Accounting and Reporting Standard Introduction
Steps in Completing GHG Inventory Principles Organizational
Define Review Set Boundaries Business Accounting Organizational
Goals Principles Boundaries
Operational Boundaries
Set Over Over time Operational Calculate Tracking Collect Data Emissions
Boundaries
Calculating Emissions
Publicly QA/QC Disclose Reporting
Inventory Review
A Corporate Accounting and Reporting Standard Introduction
Scope 1 Emissions Principles
• Direct GHG emissions from sources a company owns or controls Organizational • Examples: Boundaries – Generation of electricity, heat, or steam
– Physical or chemical processing Operational – Transportation of materials, products, waste, and employees Boundaries – Fugitive emissions
• Inclusion in GHG inventory: required over over time Scope 1 Tracking
Indirect Emissions Direct Emissions Indirect Emissions
Calculating
Emissions Reporting
Maintenance service Your factory Power plant
(owned by another company) (owned by utility company) Review
A Corporate Accounting and Reporting Standard Introduction
Scope 2 Emissions Principles
• Indirect emissions from purchased electricity, steam, Organizational Boundaries heating and cooling
– For office-based businesses Scope 2 usually most significant Operational – Can be reduced through energy efficiency and conservation Boundaries
• Inclusion in GHG inventory: required over time Scope 2 Tracking
Indirect Emissions Direct Emissions Indirect Emissions
Calculating
Emissions Reporting
Maintenance service Your factory Power plant
(owned by another company) (owned by utility company) Review
A Corporate Accounting and Reporting Standard Introduction
Scope 3 Emissions Principles
• All other indirect emissions Organizational
• Examples: Boundaries – Transport in vehicles not owned/controlled by the company
– Energy consumed during customer use of company products Operational • Inclusion in GHG inventory: optional under Corporate Standard Boundaries – Although may be required by some programs
– Required by GHG Protocol Scope 3 Standard over over time Scope 3 Tracking
Indirect Emissions Direct Emissions Indirect Emissions
Calculating
Emissions Reporting
Maintenance service Your factory Power plant
(owned by another company) (owned by utility company) Review
A Corporate Accounting and Reporting Standard Introduction
Steps in Identifying and Calculating Emissions Principles
Identify Sources Organizational
Boundaries Operational
Select Calculation Approach Boundaries
over over time Tracking
Collect Data and Choose Emissions Factors
Calculating Emissions
Apply Calculation Tools Reporting
Roll-up Data to Corporate Level Review
A Corporate Accounting and Reporting Standard
Introduction Principles
Summary
Organizational Boundaries
• Follow 5 GHGP principles when reporting Operational
• Required reporting: Scopes 1 and 2 Boundaries over over time • Optional reporting: info on Scope 3, performance, offsets Tracking
• If participating in a GHG program, check its reporting requirements
Calculating Emissions
• Interpreting emissions using ratio indicators
Reporting Review
A Corporate Accounting and Reporting Standard Science Based Targets Initiative
23 INTRODUCTION TO SBTs WHAT IS THE SCIENCE BASED TARGETS INITIATIVE ?
The Science Based Targets initiative drives ambitious climate action in the private sector by enabling companies to set science-based emissions reduction targets to meet the goals of the Paris Climate Agreement. INTRODUCTION TO SBTs WHAT ARE SCIENCE-BASED TARGETS?
5 to 15 years
1 Science-based emission 1 reduction target (SBTs)
Emissions (tCO2e) Emissions Click to add text
Emissions pathway aligned to a Paris temperature goal
Targets adopted by companies to reduce greenhouse gas (GHG) emissions are considered "science-based" if they are in line with what the latest climate science says is necessary to meet the goals of the Paris Agreement: limiting global warming to well below 2°C above pre-industrial levels and making efforts to limit warming to 1.5°C.
SBTs help companies determine how much and how fast they need to reduce its GHG emissions. INTRODUCTION TO SBTs THE SCIENCE BEHIND SBTs
To produce its methods and tools, the SBTi uses the science developed and/or systematized by actors such as the International Energy Agency (IEA), Integrated Assessment Modeling Consortium (IAMC), Intergovernmental Panel on Climate Change (IPCC), Task Force on Climate-Related Financial Disclosure (TCFD), United Nations Environment Program, among several other actors of the international scientific community.
To better understand how each source is used/accessed by the initiative, please consulting the SBTi document “Foundations of science-based target setting”. INTRODUCTION TO SBTs THE IPCC REPORT ON GLOBAL WARMING OF 1.5°C
The IPCC released the Special Report on Global Warming of 1.5ºC (SR15) in October 2018. The report makes a very strong case about the need for limiting warming at 1.5ºC and highlights the multiple risks and impacts of reaching 2ºC of warming.
In order to limit global warming to 1.5°C, the world needs to halve CO2 emissions by around 2030 and reach net-zero CO2 emissions by 2050. HOW TO SET A TARGET STEP 1: COMMIT
AFTER DAY 1 24 MONTHS APPROVAL
Company submits a Company works on Company presents Company Company report its letter establishing an emissions the target to the announces the wide emissions and its intent to set a reduction target in SBTi for official target and inform progress against science-based line with the SBTi validation stakeholders targets on an target criteria annual basis Net-zero definition NET-ZERO CRITERIA Reaching net zero emissions for a company means achieving a state in which the activities within the value-chain of a company result in no net impact on the climate from greenhouse gas emissions. This is achieved by reducing value- Simplified net-zero target chain greenhouse gas emissions, in line with 1.5°C pathways, and by balancing the impact of trajectory any remaining greenhouse gas emissions with 1. Interim science-based targets: an appropriate amount of carbon removals. companies shall have interim SBTs that meet specific leadership criteria 1. Interim
Emissions (tCO2e) Emissions SBT (e.g., target ambition and boundary) 2. Net-zero target: targets shall 2. Net-zero target include deep decarbonisation of 1.5°C-aligned value chain emissions paired and mitigation carbon removals that neutralise all pathway unabated emissions 3. Optional compensation: companies are encouraged to Gross GHG emissions 3. Optional compensate for unabated emissions compensation Carbon removals by providing annual support to projects, programs, and solutions Compensation activities that provide quantifiable benefits to climate, people, and nature OUR PROGRESS TO DATE Appendix
31 USE CASE: S-Ray Products Examples of Practitioner Application
32 ARABESQUE S-RAY CLIMATE SOLUTIONS Temperature Score 3 given their Companies Incentivising their temperature term Companies Objective and companies Many ° C . carbon current emissions companies an temperature Assessment incomplete to scores receive Disclosure that behaviour pathways track following do do are and a not score - not often . near disclosure report they GHG publicly publicly - term assigned reflecting are this protocol disclose and score on data disclose relatively given long . the Further, are of emissions - . emissions and emissions Scope emissions setting terms overview Three Prioritising Energy emissions sector The Science reduction temperature - 3 additional specific of Agency - a Based emissions estimations of their and pathways Climate Science targets a . the company’s emissions indicators benchmarks . - Based are score voluntary reduce from often is target provide reductions climate the the non calculated disclosure - incentive International and comparable to a action broader reduce trend, using using for of in 33 CLIMATE PATHWAYS Temperature Score emissions pathways, emissions the Temperature Score gas greenhouse reported from emissions each company to a based on temperature, sector across corporations the world are to the contributing in rise By temperature. global translating publicly S Arabesque The - Ray® Ray® Temperature Score metric is a unique that measures extent to the which recognises the companies that are companies the leaders in climate action. - specific specific 34 CLIMATE PATHWAYS Scoring Model Sources: https://sustainability.aboutamazon.com/amazon_ghg_verification_statement_2019.pdf Amazon RWE Sector: Sector: 'Other' Define Sector: 'Power’ Sector: the scoring scoring benchmarkthe USD$2010 USD$2010 Ratio Intensity Emission Revenue 1+2 Scope USD$2010 Ratio Intensity Emission Revenue 1+2 Scope Normalise = x10 €13.41 = x10 $ 386 ,, = 96290000 tCO = 11260000 tCO https://www.group.rwe/ companyemissions 9 9 = 6377 tCO = 34 tCO 2 2 e e - /media/RWE/documents/09 2 e/million e/million 2 e/million e/million - verantwortung 2030: 2030: 2ºC 2050: >2.7ºC 2030: 2030: >2.7ºC 2050: >2.7ºC - Sector: 'Other'Sector: nachhaltigkeit/cr Sector: Sector: 'Power’ Score the company - berichte/EN/cr - report - 2019.pdf 35 Index Objectives The climate index portfolio targets full range of investor objectives acts constructed in accordance with the minimum standardslaid down in the delegated manner the that resulting portfolio is on a decarbonisation trajectory and is also Index where underlyingthe assets are selected, weighted or excluded in such a S S the the underlying benchmark while minimizing tracking error manner the that resulting portfolio has a significantly lower emissions intensity than Index where the underlying assets are selected, weighted, or excluded in sucha Climate Climate targetsfocus PABonEU objectives index in design S Climate targetsfocus objectives CTB in onEU index design focus scope intargets and 2,Climateemissions1, index design 3on standardslaid down in the delegated acts the Paris Climate Agreement and is also constructed in accordance with the minimum portfolio’s emissionsGHG are aligned with the long Index where the underlying assets are selected in sucha manner the that resulting - - - Ray ClimateTransition Index Ray Low Ray Ray Paris - Carbon Carbon Index - Aligned Index Type - term global warming target of ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ InvestorObjectives: InvestorObjectives: InvestorObjectives: Alignment with the EU Paris Aligned Benchmark Aligned Paris EU the with Alignment Benchmark Transition Climate EU the with Alignment TE + Minimize Decarbonize + Exposure Beta Maintain Alignment with the EU Paris Aligned Benchmark Aligned Paris EU the with Alignment Benchmark Transition Climate EU the with Alignment Decarbonize + Exposure Beta Maintain Benchmark Aligned EU Paris the with Alignment Benchmark Transition Climate EU the with Alignment Decarbonize + Exposure Beta Maintain Implementation + Minimize TE + Minimize TE + Minimize FOR INTERNAL USE ONLY
ARABESQUE S-RAY® Index Tuning average average carbon intensity are shown inthe gray box. and a minimum 30% percentage reduction of weighted Here, allportfolios with a maximum tracking error of 0.50 by deviating from the underlyingindex. between the desired andtilt the tracking error risk imposed algorithm, a client can determine their optimal trade By modifying the parameters passed to the signal Trade Tilt/RiskCustomizable - off - tilt - off Sources: Sources: FactSet and Arabesque S - Ray ARABESQUE S-RAY®
Temperature™ Score Portfolio Impact and away and away from those on 2.7 The selectedmethodology has theeffect of tilting towards companies that are alignedwith 1.5 Low - carbon Sources: Sources: FactSet and Arabesque S index Temperature - Ray ° and >2.7 ™ ° tilts pathways … … … ° and 2 ° scenarios, scenarios, References and Useful Links
World Resources Institute GHG Protocol • GHG Inventory Development Process & Guidance: https://www.epa.gov/climateleadership/ghg-inventory- development-process-and-guidance#step1
• Target Setting US EPA: https://www.epa.gov/climateleadership/target-setting
The Society for Corporate Governance • Morrow Sodali: “Institutional Investor Survey 2021” (May 2021)
• SquareWell Partners: “The Changing Climate on Investor Behavior” (April 2021)
• Society for Corporate Governance: “2021 Sustainability Practices Benchmarking Survey” (January/February 2021)
• Society: “Climate Disclosure Questionnaire” (August 2019)
39 Thank you
Disclaimer The Arabesque group of companies (the “Arabesque Group”) is a provider of data, advisory, technology and financial services. Arabesque S-Ray® is a service provided by Arabesque S-Ray GmbH (“Arabesque S-Ray”) and its branch and subsidiary companies. Arabesque S-Ray is a limited liability company (Gesellschaft mit beschränkter Haftung) incorporated in Frankfurt am Main and organized under the laws of Germany with registered number HRB 113087 in the commercial register of the local court with its seat and business address at Zeppelinallee 15, 60325 Frankfurt am Main, Germany. The asset management activities referred to herein are provided by Arabesque Asset Management Limited (“AAML”) and its branch and subsidiary companies. AAML is a private limited company incorporated under the laws of England and Wales, with company number 08636689 and with its registered address at Second Floor, Victoria House, Bloomsbury Square, London, WC1B 4DA. AAML is authorised and regulated by the Financial Conduct Authority in the United Kingdom and is a registered with the United States’ Securities and Exchange Commission as an investment adviser. The artificial intelligence products and services referred to herein are provided by Arabesque AI Limited (“AAIL”). AAIL is an Appointed Representative of AAML which is authorised and regulated by the Financial Conduct Authority. AAIL is a private limited company incorporated under the laws of England and Wales, with company number 12180670 and with its registered address at Second Floor, Victoria House, Bloomsbury Square, London, WC1B 4DA. This document is provided on a confidential basis by Arabesque S-Ray and is for information purposes only; accordingly, it is not a solicitation or an offer to buy any security or instrument or to participate in any trading activities. NOT AN OFFER. This document does not constitute an offer to sell or solicitation to purchase any shares in any Fund to any person, and shall not be construed as a recommendation or advice on the merits of investing in a fund. THIRD PARTY INFORMATION. Certain information contained in this document has been obtained from sources outside Arabesque. While such information is believed to be reliable for the purposes used herein, no representations are made as to the accuracy or completeness thereof and none of the Arabesque Group nor its affiliates takes any responsibility for such information. RELIANCE – the Arabesque Group makes no representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and accepts no liability for any loss, of whatever kind, howsoever arising, in relation thereto, and nothing contained herein should be relied upon. CONFIDENTIALITY. This document contains highly confidential information regarding Arabesque’s investments, strategy, and organization. Your acceptance of this document constitutes your agreement to keep confidential all the information contained in this document, as well as any information derived by you from the information contained in this document and not disclose any such information to any other person. This document may not be copied, reproduced, in any way used or disclosed or transmitted, in whole or in part, to any other person. ENQUIRIES – Any enquiries in respect ofthis document should be addressed to the Arabesque Group.
40