Major super funds turn to start-up Emmi to identify equities climate risk

Emmi chairman Tim Samway, who has had a 25-year career in funds management and is also chairman of Hyperion Asset Management, said the start-up was influenced by a speech Mark Carney gave when he was governor of the Bank of England in 2015, where he described the “tragedy of the horizon”.

A short-term myopia, the problem is common in environmental economics: future generations are hit with costs that the current generation has no direct incentive to fix.

“The danger of the tragedy of the horizon is managers get focused on punching out the next quarter or year, and miss being positioned for the opportunities, or are positioned in a highly risky area without realising it,” Mr Samway said.

Many mid-sized companies have looming scope 3 emission risks unappreciated by the market, he added.

“Investment managers should be concentrating their capital on businesses that can use carbon most efficiently, and just having one metric is not enough,” he said. “The lack of forecast metrics is restricting decision-making.”

But over the past few years – in a trend that will only accelerate after COP26 – investors have become more aware of the risks from not engaging in debate about decarbonisation of the economy: managers who cannot prove ‘environmental, social and governance’ (ESG) credentials risk losing mandates to the managers who can.

Emmi can help analysts trying to get their head around carbon risk in listed equities, where challenges include greenwashing, superficial data and a lack of standardisation around corporate disclosures. This can make it hard to assess whether companies’ carbon-intensive assets are at risk of being stranded, or whether dividend streams are safe.

It provides a more data rich approach than ratings-based products like the ones provided by Sustainalytics, a Morningstar company, which are largely opinion-based.

In contrast, Emmi is partnering with the climate finance department of the University of Otago in New Zealand, which is applying its machine learning models to disclosures made by the entire global market of equities and deploying neural networks which can predict carbon emissions for any company based on their financial disclosures.

The models are crunching the publicly disclosed data on scope 1, 2 and 3 emissions, an improvement on existing ESG data sets from Institutional Shareholder Services or Refinitiv, which are lagging, incomplete and only cover around one-quarter of the listed universe. Trust scores and uncertainty analysis firms up confidence levels. The next step is developing relationships with individual companies to feed data into the system directly, to create a network effect.

Unlike the ratings tools, Emmi allows asset managers to plug in assumptions about carbon prices or different scenarios for degrees of global warming. It can assist with developing hedging strategies, after COP26 made inroads on Article 6, an agreement to create a standardised voluntary market across countries.

Michael Lebbon, Emmi’s CEO and co-founder, who has worked in carbon markets for 15 years, said the company is “building the foundations of a fully-fledged carbon ecosystem that has the flexibility to solve many problems around carbon transition for investors”.

Because it has been built from the ground up, any changes in regulatory policy – whether from Taskforce on Climate-related Financial Disclosures (TCFD) or global prudential regulators – can easily be incorporated.

“Investors want to be able to justify decisions, validate, and have conviction in their assumptions and risk tolerances,” Mr Lebbon said.

“We provide transparent data to help do the heavy lifting for them, so they can start inquiring.”

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