Achieving a bottom-up approach to GHG accounting
Visualisations, such as this brilliant graphic from Our World in Data, provide a 'birds-eye' summary of global energy consumption and a useful indicator of how decarbonisation spend should be apportioned to achieve greatest environmental impact. The global outlook does not necessarily reflect specific cases however. 'Emissions skew' can shift dramatically even from one country or region to another based on local conditions and infrastructure.
When it comes to prioritising specific climate-action at a granular company level, the carbon footprints of individual business units are likely to exhibit their own distinctive skew - this is why bottom-up GHG accounting is such a useful tool. By adjusting and refining top-down analysis, bottom-up GHG accounting enables more accurate benchmarking and provides better visibility of risks. In turn this supports more credible emission reduction strategies and translates to greater material impact per $ invested.
B2B Co-operation makes sense
Although bottom-up emissions accounting is resource intensive, the burden can shared and ought to be supported by multiple stakeholders. Asset managers have an incentive to support and assist greater reporting accuracy within their portfolio companies; doing so enhances their ability to attract sustainable investment. By contrast, hazy reporting leaves AMs at a competitive disadvantage - especially in a market where ESG criteria are in the ascendency, investor sensibilities are changing, and credibility trades at a premium.
The difficulty of quantifying emissions across the value-chain, means that (all else being equal) businesses will preferentially select up-stream suppliers which provide robust emissions data at source. Even if this data reflects poorly on the overall emissions profile, it is still preferable to absent or unreliable data because it provides an efficient starting point for corrective action. Businesses may even opt to remunerate suppliers which identify emission reduction opportunities in much the same way as tech companies (e.g. Google and Microsoft) reward users who identify security vulnerabilities in their applications. This 'tech company' approach can be leveraged to incentivise B2B cooperation between companies throughout the value-chain.
There are also inherent advantages to be had. The granular bottom-up approach to GHG accounting entails, by its very nature, far better internal visibility of operational processes than can be gleaned by reviewing standard financial metrics alone. Companies which champion this approach are therefore better positioned to improve operational control, eliminating redundant processes, avoiding duplication, and enhancing overall logistical efficiency. These factors improve basic cost management, enhance return on equity and therefore can help elevate net financial performance.
All in all, granular emissions profiling plays to the advantage of businesses throughout the value-chain. The task of bottom-up quantification, while daunting and resource intensive, can be made less onerous if institutional investors, investee companies, and their suppliers collaborate strategically in pursuit of mutual benefit. Asset managers are perhaps uniquely poised to kickstart cross-coordination between portfolio companies. Joined-up emissions data can be leveraged to improve aggregate economic performance, create positive environmental impact, and attract sustainable investment capital.