Measuring Carbon Footprints

A necessary step towards measuring the environmental impact of our investments, as well as assessing their associated climate risks, is to measure the quantity of greenhouse gas emissions embedded in them. We have been measuring the carbon emissions of all our equity investment solutions for sustainability since 2011. We are now measuring the carbon emissions of both equity and fixed income portfolios.

In May 2015, we were one of the first signatories of the Montreal Carbon Pledge. By signing it, we committed to progressively measuring and publicly reporting the carbon footprint of our open-ended funds in an informative and explanatory way. In December 2018, we measured and reported the corporate carbon footprint on more than €50 billion of assets under management on open-ended fixed-income and equity funds. As part of our Global Sustainability Strategy, we committed in 2019 to reporting the carbon footprint of a wider range of our portfolios and for these portfolios to have a lower carbon footprint than their respective benchmarks. As part of our Net Zero roadmap, we have committed to reducing the carbon footprint of BNP Paribas Asset Management’s in-scope AUM by 50% by 2030. Additionally, carbon emissions measures have been a heavily weighted factor in our proprietary ESG scoring model for corporates & sovereigns since inception.

In 2021 BNPP AM developed an internal carbon footprinting methodology for sovereign issuers, and has since contributed key elements of this internal definition (notably the choice of a purchasing power parity weighted denominator) to the PCAF sovereign framework. In 2023 BNPP AM began disclosing the sovereign carbon footprint of its portfolio holdings within the Principal Adverse Impact framework.

The GHG Protocol sets up the standards to measure Greenhouse gases (GHG) emissions that are widely used by corporates. A credible measure of GHG emissions should cover the seven GHG covered by the Kyoto protocol: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PCFs), sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3). By convention these GHG are measured in CO2 equivalent (CO2e) to ease the comparison. GHG emissions should be measured along the operational boundaries of the company and should take into account all the emissions associated directly or indirectly with the operations of the company/sovereign. Three “scopes” of emissions are defined for GHG accounting to categorize direct and indirect emissions:

As at today, BNPP AM uses Scope 1 & 2 to calculate companies’ emissions and portfolios’ carbon footprints. Scope 3 emissions are not yet taken into account in the calculation due to coverage and accuracy concerns related to Scope-3 emissions across BNPP AM’s investment universe. BNPP AM has developed a methodology to calculate Scope-3 emissions but BNPPAM considers the data as not robust enough for portfolio construction purposes.

BNPP AM also integrates sovereign scope 3 data into its reporting, however the coverage and robustness of this data is also low.

The need to measure a carbon footprint for all portfolios and benchmarks means BNPP AM needs data covering global investments. While disclosure has improved since BNPP AM began its carbon footprint work, most companies worldwide still do not disclose information on their carbon emissions.  BNPP AM has therefore decided to supplement corporate disclosure with estimation methods, in order to provide better reporting of our environmental impact and to support carbon reduction in the absence of reported data.

After having reviewed different data providers, BNPP AM has decided to use a tiered approach to carbon footprint, blending data sourced from the Carbon Disclosure Project (CDP), Bloomberg, and Trucost, with final review of estimated data based on a proprietary machine learning model. We have pursued this approach to maximise both coverage of directly reported figures and confidence in the estimated data that we are using.

For the purposes of normalising carbon emissions to be comparable across issuers, a source of financial data at issuer level is necessary. For this, BNPP AM uses Factset’s Refinitiv Worldscope fundamentals data to collect the Enterprise Value for each company.

To align with regulatory definitions, BNPP AM has selected Enterprise Value Including Cash (EVIC) as a denominator. EVIC data is extracted as of the end of the fiscal period consistent with the period over which CO2e Emissions were measured.

The Carbon Footprint of a given issuer is defined as the ratio of the scope 1 and 2 emissions of a company to its respective EVIC:

For BNPP AM, a portfolio’s carbon footprint is the weighted sum of the ratios of the carbon emissions of companies to their respective EVIC. The sum is weighted by the weight of each company in the portfolio. Carbon emissions are the sum of Scope 1 and 2 emissions:

with:

Wptf,i: % of Portfolio weight in company i

CO2e Emissions i: sum of Scope 1 & 2 CO2e emissions expressed in tons for company i

Enterprise Value Including Cash (EVIC) i: Market Capitalization of ordinary & preferred shares + minority interest + total debt for company i

In case some portfolio companies do not have carbon footprint data, or the portfolio holds asset classes not covered by carbon footprint methodologies (e.g., cash), the calculation will be adjusted to account for the total portfolio weight covered by carbon footprint data, to avoid any bias from lack of coverage. The coverage-adjusted portfolio carbon footprint formula will therefore be:

Scope 1: CO2 emissions of PRIMAP hist

PRIMAP hist combines several published data series to create a complete set of greenhouse gas emission pathways for each country and Kyoto gases for the years 1750 to 2021.

Our current methodology also includes land use, land use change and forestry (LULUCF) activities in the calculation of Scope 1. The data come from FAOSTAT, a Food and Agriculture Organisation of the United Nations (FAO) that monitors absolute changes in land use and forestry and produces emission estimates using these geospatial data. We believe that considering land use in sovereign emissions offers the most comprehensive picture of sovereign GHG, despite the uncertainties of satellite estimation models.

Scope 2: CO2 emissions by energy source of the International Energy Association (IEA), used to estimate the imported carbon of electricity production.

IEA recommends policies that improve energy reliability, affordability and sustainability – as part of this work, they track energy flows across countries and emissions generated by energy production. Our Scope 2 figures are based on an approximation using this IEA data – we take a country’s average emissions intensity of energy production and multiply this by the total amount of purchased / imported electricity.

Scope 3: CO2 emissions linked to production of imports & the use of exported products, from the OECD.

Denominator: Purchasing-Power-Parity adjusted GDP

For the purposes of normalising carbon emissions to be comparable across sovereigns, we have opted to use gross domestic product (purchasing power parity-adjusted) for emissions by sovereign (bond) issuers. 

Alternative metrics include the population count and outstanding debt. However, both options have more cons than pros. Opting for outstanding debt will favour countries that are highly indebted and countries that can improve their relative ranking by issuing more debt.

Using the population count is a valid alternative denominator but as BNPP AM is a financial institution, it has opted to maintain the link to financial data.

Monitoring portfolios’ carbon footprints is one of the key indicators to understand how asset managers can track their net-zero targets and commitments. However, when we were working on the development of our Corporate and Sovereign Carbon footprint methodologies, we realised that in practice the aggregation is very challenging because carbon footprints may be driven by different climate-related and financial variables. In the Corporate Carbon footprint methodology we have identified that the best denominator to use is the enterprise value, while for our Sovereign Carbon footprint methodology the decision was to use the revenue based denominator. Given the complexity and difficulty of technical implementation we have taken a decision to keep both indicators separate for now and revisit the aggregation gap in future carbon footprint methodologies at the issuer level, such as Sub-Sovereign, as well as absolute annual project emission methodologies are introduced and integrated.

For BNPP AM, a portfolio’s carbon footprint is the weighted sum of the ratios of the carbon emissions of sovereigns to their respective Purchasing-Power-Parity adjusted GDP. The sum is weighted by the weight of each sovereign in the portfolio. Carbon emissions are the sum of Scope 1 and 2 emissions:

with:

Wptf,i: % of Portfolio weight in sovereign i

CO2e Emissions i: sum of Scope 1 & 2 CO2e emissions expressed in tons for sovereign i

GDP PPP adjusted: Purchasing-Power-Parity from the World Bank

In case some portfolio Sovereigns do not have carbon footprint data, or the portfolio holds asset classes not covered by carbon footprint methodologies (e.g., cash), the calculation will be adjusted to account for the total portfolio weight covered by carbon footprint data, to avoid any bias from lack of coverage. The coverage-adjusted portfolio carbon footprint formula will therefore be: