Specifically, the product reports will provide valuable information for investors and should become a standard reference for every well-informed retail investor.
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Investing into what nobody wants? Better go with the sustainability wave
Only days ago, Apple launched a new video on its sustainability reporting. In it, 'Mother Nature' appears in the office and begins to exert pressure on Apple's decision-makers.
The result is a reduction in greenhouse gas emissions across the entire value chain. For Apple to achieve emissions reduction, its suppliers also need to lower their emissions.
Imagine you are invested in suppliers that do not prioritise emissions reduction.
This situation could spell trouble for your investment, as these companies may either be compelled by their clients to transition to greener supply chains or risk losing new contracts.
In any case, it translates to lower revenues and higher costs for your investment, ultimately resulting in negative effects on your financial returns.
Better look at the TCFD report of your investment funds
To foster improved transparency throughout these value chains, TCFD reporting is now being introduced.
An increasing number of funds will be required to produce a TCFD product report, ultimately providing the level of transparency investors need to evaluate potential climate risks.
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A TCFD report offers the insights necessary to assess a fund. This article will delve deeper into the data points, offering guidance on how to interpret them and what to look for.
Principle One: Do not compare what should not be compared
Climate reporting is far from trivial, and your understanding of the following principles likely places you in the top 1% of individuals who comprehend what is happening.
When dealing with figures related to greenhouse gases, it is crucial to first understand the data being presented.
Emissions are categorised into what are known as Scope 1, Scope 2 and Scope 3 emissions.
While Scope 1 and Scope 2 emissions typically occur in conjunction, Scope 3 emissions are frequently overlooked.
It is essential to exercise caution when comparing two funds, of which one reports Scope 3 emissions while the other does not. You can typically identify this distinction in a well-prepared report by examining the actual chart or the chart's legend.
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By contrast, in a subpar report, this information may only be found in the appendix or glossary. If you cannot locate any references to Scope 1, Scope 2 and Scope 3 emissions in the TCFD report at all, it may be wise to sound the alarm and reconsider this investment.
You might come across statements indicating that Scope 3 emissions are only estimated and not officially reported by the company.
However, trust me, in these analyses, it is preferable to have estimated Scope 3 emissions than no Scope 3 emissions data at all. This insight does not originate from me but comes from global industry leaders.
Principle Two: Check if everything is reported - only a full report is adding the needed value
You might be wondering what to watch out for. A TCFD report consists of narratives detailing the fund's strategy and quantitative metrics.
Governance narratives should include information regarding climate-related risks and opportunities, along with an assessment of how these risks and opportunities are managed within the organisation's governance structure.
Strategy narratives should encompass a comprehensive analysis of climate-related risks and opportunities in the short-, medium- and long-term, as well as an examination of their impact. Additionally, they should outline the organisation's 2°C resilience strategy.
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Risk management narratives should cover the management of climate-related risks, the process involved in handling these risks, and how the organisation integrates climate-related risk management into its overall operations.
When examining quantitative data, be sure to pay attention to the following metrics and terms: carbon footprint, carbon emissions (including financed emissions and GHG emissions), weighted average carbon intensity, also called carbon sales intensity, and carbon-intensive sector exposure.
If the carbon-intensive sector exposure is high, you should also expect to find numbers related to scenario analysis and global warming potential - also called temperature rise, implied temperature rise or ITR, in the report.
I would like to emphasise that while it might seem trivial to simply rely on fancy charts and numbers, this does not fully capture the complexity of the real world we inhabit.
Therefore, dedicating some time to a thorough analysis is likely to be highly valuable.
Although delving into this subject may initially feel like a heavy lift, you should soon become more comfortable with these numbers.
In the end, it is only a handful of distinct metrics, and they will become increasingly prominent in the years to come.
It is important to remember that if 'Mother Nature' visits Apple, she will likely knock on the doors of other companies as well.
The reduction of greenhouse gas emissions is not merely a trend driven by social consciousness; it is a tangible and vital reality.
Matthias Breier is head of ESG product at FE fundinfo