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In addition, there are significant challenges associated with data quality, as a lot of data are not based on actual emissions but are estimated by data providers. At the same time, data from data providers is based on historical emissions and can therefore not be used to understand the companies’ current position and ... |
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Responsibility 2018 nies’ emissions are chiefly allocated between shareholders and not bond holders and debt holders. Another challenge of portfolio carbon footprint measurements is double counting. The challenges were described in greater detail in ATP’s Responsibility Report 2017. TCFD also acknowledges that the metr... |
ATP believes that transparency is important and publishes the metrics in the continued hope that this will lead to better metrics in the area through a more balanced debate at company level. |
Methods for calculating carbon footprint In 2017, ATP calculated and published the carbon footprint of its equity portfolio according to the four methods listed by the TCFD in its recommendations for investors.1 The four methods are called ‘Total Carbon Emissions’, ‘Carbon Footprint’, ‘Carbon Intensity’, ‘Weighted Aver... |
ATP will also publish the carbon footprint of its equity portfolio according to the four methods in 2018, but because ATP also calculates the carbon footprint of its corporate bond portfolio, it is necessary to adjust one of the parameters in the calculation methods. |
Without these adjustments, only the WACI method can be used to meaningfully calculate the carbon footprint of the corporate bonds. The ‘Total Carbon Emissions’, ‘Carbon Footprint’ and ‘Carbon Intensity’ metrics distribute the portfolio companies’ total carbon emissions on the basis of the companies’ market cap. It is a... |
Market cap is the market value of a company’s total share capital and is calculated by multiplying the market price by the number of outstanding equities. There are substantial challenges associated with the distribution of the portfolio 1 The TCFD recommends that investors as a minimum calculate the carbon footprint a... |
2 A more detailed description and discussion of the four methods can be found in ATP’s Responsibility Report 2017 from page 22. More information can also be found about the methods for calculating carbon emissions (including scope 1, scope 2 and scope 3). |
CASE: Enterprise Value. |
A company’s enterprise value is basically calculated as the company’s market cap plus its total debt minus its total cash and cash equivalents.1. |
In most cases, the companies’ enterprise value will be positive and larger than the market cap and the total debt as illustrated in the figure. However, this does not have to be the case, as companies whose cash and cash equivalents are higher than their total debt will have a larger market cap. In some isolated cases,... |
The deduction of the company’s cash and cash equivalents is particularly problematic, as it gives rise to some degree of double counting. |
1 The calculation of the enterprise value incorporates other key figures, so the above is slightly simplified. |
2 ATP’s calculation of its carbon footprint is adjusted for such abnormalities, and nor is the enterprise value used for companies in which it cannot meaningfully be calculated. This applies to banks, among others, where the calculation is instead made using the companies’ market cap. |
0 1 |
2 3 |
4 5. |
Market Cap. |
Total Debt Cash Enterprise Value |
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Responsibility 2018 companies’ carbon emissions on the basis of the companies’ market cap when corporate bonds are included in the calculation of an investor’s carbon footprint. |
Market cap to be replaced by enterprise value Pollution and greenhouse gas emissions are caused by the companies’ assets and business activities. The companies’ assets are financed in different ways, some by equity issues, others, such as corporate bonds, by debt issues. Investors, both as bond holders and shareholders... |
In a calculation of carbon footprint which is based on the market cap, the company’s total emissions are distributed among its shareholders according to their respective ownership share of the outstanding equities. |
ATP believes that distributing the portfolio companies’ carbon emissions among both debt holders and shareholders yields a more accurate result. If emissions are distributed among shareholders as well as bond holders on the basis of the market cap, the same total emissions will. |
CASE: Overestimation of exposure to climate-related risks at market cap. |
As at 31 December 2017, ATP had a shareholding of approx. DKK 90 million in the Japanese utility company Tokyo Electric Power Company. As a utility company that mainly operates power stations in Japan, the company had relatively high emissions measured according to scope 1 and scope 2. |
As at 31 December 2017, Tokyo Electric Power Company had an enterprise value that was more than nine times higher than the company’s market cap. This is due to the company’s capital structure, where the company is primarily financed through debt issues. |
In 2017, ATP calculated its carbon footprint based on the market cap. As a result, ATP’s share of the company’s carbon emissions was significantly higher than if the enterprise value had been used as the allocation key. |
Corporate capital structures vary considerably. Some companies have a high debt ratio, while others are primarily financed through equity issues. In most cases, the companies’ enterprise value exceeds their market cap, which indicates that the companies have a considerable amount of debt. When the carbon footprint is c... |
Although ATP’s position in Tokyo Electric Power Company was relatively modest at the end of 2017 (around 0.1 per cent of ATP’s total equity portfolio), this position accounted for more than 11 per cent of ATP’s total carbon emissions in the calculation for 2017. This example shows that the challenge with the metrics is... |
Key figures – Tokyo Electric Power Co. |
Market Cap (MC): DKK 39,422 million. |
Enterprise Value (EV): DKK 374,589 million. |
Revenue: DKK 336,288 million. |
Scope 1+2: 91,598,591 tonnes of CO2e |
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Responsibility 2018 be ‘distributed’ among the investors multiple times (double counting). |
One way to get around this problem is by using the metric enterprise value. The enterprise value is a way to estimate the total value of a portfolio company and is a more accurate measure of a company’s total equity and liabilities. Although the enterprise value has some advantages compared to the market cap, it is a f... |
ATP therefore adjusts its calculation method, so it distributes emissions based on a company’s enterprise value rather than its market cap. However, in order to ensure transparency about the development from 2017 to 2018, ATP has also chosen to calculate the equity portfolios’ carbon footprint according to last year’s ... |
CALCULATIONS OF PORTFOLIO CARBON FOOTPRINT. |
The calculated carbon footprint appears from the table. |
Here, it can be seen that the carbon footprint (calculated using the Carbon Footprint method) of Nordic equities and international equities is very similar. In 2017, when ATP calculated its metrics based on the market cap, the footprint from international equities far exceeded that of Nordic equities. The table in Appe... |
One of the reasons for the decline in the carbon footprint of international equities when introducing the enterprise value is that the quantitative selection method for international equities includes a value factor, among other things. Companies that are selected on the basis of a value factor will often be characteri... |
The underlying companies in ATP’s corporate bond portfolio are distinguished by their lower emission levels – when adjusted for differences in the size of the companies’ enterprise value – relative to the companies in ATP’s two equity portfolios. |
It is important to keep in mind that the calculations are based on data material with limited coverage of companies and emissions. ATP’s data provider, which has broad global coverage, does not have data on all ATP’s portfolio companies. Consequently, holdings on which ATP does not have any data have been omitted in th... |
Carbon Footprint (tonnes CO2e/DKKm) |
Carbon Intensity (tonnes CO2e/DKKm) |
WACI (tonnes CO2e/DKKm) |
Nordic equities 20.79 39.68 29.07. |
Scope 1 19.43 37.07 25.94. |
Scope 2 1.37 2.61 3.13. |
International equities 20.08 27.35 36.49. |
Scope 1 16.95 23.09 30.89. |
Scope 2 3.13 4.26 5.60. |
Corporate bonds 10.39 14.01 22.39. |
Scope 1 7.20 9.71 16.44. |
Scope 2 3.19 4.30 5.95. |
Carbon footprint at portfolio level, Nordic equities, international equities and corporate bonds for 2018 (Enterprise Value) |
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Responsibility 2018. |
This presents a special challenge for ATP’s corporate bonds, where the data provider only covers just under 41 per cent of the holdings. For equity holdings, the provider covers 88 per cent of the underlying companies, although with a lower coverage of Nordic equities. ATP continues its efforts to improve the coverage ... |
Data providers focus on first covering companies that are likely to have high emission levels, such as utility and energy companies. Companies in industries with lower emission levels, for example financial, consultancy and research companies, are included later. |
For investors it may mean that the carbon footprint at portfolio level is overstated, because portfolio companies with relatively low emission levels are not included in the analysis. The problem is particularly pronounced in cases where coverage is low, for example in ATP’s corporate bond portfolio. |
ATP usually uses emission data at company level, and in this respect the data providers’ priorities are absolutely. |
Physical risks and transition risks. |
Physical risks: |
Acute risks • More extreme weather events, such as storms, hurricanes, flooding etc. |
Chronic risks • Changed weather conditions, more/less precipitation, sun, snow etc. |
• Changed average temperatures • Rising sea levels. |
Transition risks: |
Regulatory risks • Arrangements regarding prices of greenhouse gas emissions • Change in mandates and regulation of existing products or services, for example energy efficiency requirements • Potential claims for compensation. |
Technological risks • Disruption • Alternatives with a lower climate footprint • Costs associated with replacement/upgrade to low-emission technology. |
Market risks • Rising prices of raw materials, products or services • Changed consumption patterns. |
Reputational risks • Stigmatisation of a product, service or sector • Changed stakeholder perception – not part of the transition. |
Source: ‘Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures’, June 2017, see table A1. |
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Responsibility 2018 right. This is because it makes most sense for ATP to have data on those companies for whom this is relevant. |
CLIMATE SCENARIO ANALYSES AS A TOOL FOR INFORMING INVESTMENT DECISIONS. |
In 2018, as part of its work on implementing the TCFD recommendations on climate-related financial risk disclosures, ATP began examining how climate scenario analyses can provide input and new insights for the investment processes. In line with the ESG strategy’s third principle which states that real ESG integration r... |
It is evident that the development in the concentration of greenhouse gases in the atmosphere affects the climate through the greenhouse effect, thereby causing significant climate change. It is also clear that climate change may influence the global economy. Temperature increases, rising sea levels and more extreme we... |
The future climate development largely depends on future greenhouse gas emissions and the concentration of greenhouse gases in the atmosphere, which, in turn, depends on the active and passive choices made by decision-makers as well as population growth etc. It is therefore impossible to predict the most likely climate... |
Why use climate scenario analysis? |
What is scenario analysis? Scenario analysis is a method of analysing possible future events by considering a number of possible outcomes for the global development to assess its impact on the climate, for example. The UN Climate Panel has developed four scenarios for the global development, which each impacts greenhou... |
What can scenario analysis be used for? Scenario analysis is a tool for projecting possible outcomes for the global development. The scenarios can be used to identify significant challenges and risks associated with climate change. |
Who recommends that investors perform scenario analysis? Many key players recommend that companies and investors adopt scenario analysis as a tool for informing their business decisions. In its 2017 report, the TCFD recommended that investors take steps to implement scenario analysis, which is a relevant tool for highl... |
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Responsibility 2018. |
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