Firms are increasingly publishing disclosures aligned to the recommendations from the Taskforce for Climate-related Financial Disclosures – either by choice or to comply with mandatory disclosure requirements from the Financial Conduct Authority. As part of these disclosures, firms are calculating the greenhouse gas emissions associated with their investment portfolios and setting net zero targets. Financial services companies face many challenges when navigating the route to net zero, including significant global events such as Covid-19, economic volatility and changes to the methodology and data used to report on emissions.

Global events & economic volatility

The Covid-19 pandemic led to widespread office closures and massively reduced travel. Many firms therefore disclosed encouraging reductions in their emissions metrics between 2020 and 2021. While this is unlikely to be sustained as normal life resumes, we have seen other positive steps to reduce emissions. There has been increased targeted engagement with companies on:

• reducing emissions and transition planning;
• incorporating emissions data into the asset selection process; and
• disinvestment from high-emitting assets.

Covid-19 and political uncertainty have recently led to considerable market volatility. Emission metrics rely on financial data such as market values and issuer revenues. Market volatility therefore has a direct impact on the value of emission metrics and can result in material changes to their values.

Data and methodology

To calculate their climate metrics, many firms rely on third parties to provide data. While there is typically good data coverage for listed companies, it is more challenging to obtain emissions data for certain asset classes such as equity release mortgages and social housing. This can lead to a lack of relevant data for firms’ portfolios, therefore increasing the proportion of data which is estimated. Assumptions, judgements and proxies are used to estimate emissions in these cases, introducing a lack of comparability between firms due to diverging methodologies.

The Prudential Regulation Authority have acknowledged that some firms are using data effectively, but highlighted in their feedback on the Bank of England's Climate Biennial Exploratory Scenario exercise that all firms require more standardised data (of sufficient coverage) to aid effective disclosures. The introduction of The Global Green House Gas Reporting Standards from the Partnership for Carbon Accounting Financials has gone some way towards standardising emissions calculations and highlighting the importance of data quality metrics, but more work is needed to achieve a fully consistent approach.

As data coverage improves, estimation methodologies advance and reporting metrics become more granular, the figures that firms report in their annual disclosures may get worse before they get better. For example, companies with low data coverage could currently be underestimating their emissions. If this is the case, these companies may find their initial emission targets challenging to achieve as their data coverage improves. Reflecting this challenge, some firms have included disclaimers in their annual reports stating that climate-related targets may be subject to change, in light of new information. We expect that re-basing and adjusting targets will likely become the status quo over the coming years, as data availability increases and estimation methodologies evolve. Whilst this can make year-on-year comparisons more complex, it ensures that progress against targets can be accurately tracked.

To sum up

It remains to be seen exactly how much developing estimation methodologies, greater data availability and wider economic volatility will impact firms’ emissions disclosures, but there may be a period where apparent increases in emissions obscure the true improvements being made. To showcase these positive steps, firms should prioritise improving the data coverage and quality of their climate metrics in the short term and re-base existing targets where possible. The route to net zero will likely not be a straight one, but communication will play a key role in overcoming these hurdles.

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