Carbon footprint – TCFD Report 2020
Valori Responsabili

This content is an extract of the Task Force on Climate-related Financial Disclosures (TCFD[1]) aligned Report released by the company ISS ESG in relation to the positioning of Etica Sgr’s Linea Valori Responsabili Funds.

All asset classes have been analyzed accordingly to the TCFD recommendations, grouped as follows: Equity Portfolio; Corporate Bonds Portfolio and Sovereign Bonds Portfolio.

The data analysis reports climate performance achieved at the year-end 2019.

The related carbon metrics used in the Equity and Corporate Bonds analysis are the following ones (please refer to Appendix for more details):

• Relative Carbon Footprint: a normalised measure, defined as the total carbon emissions of the Portfolio per million EUR invested. Any reference to relative carbon metrics in the Analysis refers to tCO₂e/EUR million Invested;
• The Weighted Average Carbon Intensity (WACI): is the metric explicitly recommended by the TCFD for asset managers. The WACI allocates Scope 1 & 2 GHG emissions based on Portfolio weights and has among its positive aspects the fact that is simple to calculate and easy to communicate to investors and, most notably, it can be applied across asset classes as it does not rely on the ownership approach. Any reference to carbon intensity in the Analysis refers to tCO₂e/EUR million Revenue.

The Data Analysis goes beyond the sole carbon footprint assessment by providing various metrics used to assess climate-related risks and opportunities in forward-looking perspectives. Those metrics include^[2]: carbon risk rating, scenario analysis, transitional climate risk and physical risk exposure.

^{[1] Launched after the 2015 Paris Agreement by the Financial Stability Board (FSB), the Task Force on Climate-related Financial Disclosure (TCFD – https://www.fsb-tcfd.org/) considers climate transparency as a crucial factor for the stability of financial markets. The objective of the TCFD is therefore to improve climate transparency in financial markets through recommendations on disclosure. These recommendations provide a “consistent framework that improves the ease of both producing and using climate-related financial disclosures”. The TCFD aims to create a unique standard for both corporate and investment disclosure, understanding that local regulatory frameworks may require different compliance levels.}

^{[2] The metrics mentioned in the list refer to equity and corporate bonds portfolios. For sovereign bonds portfolios the risk-related metrics are limited to physical risk exposure of countries.}

^{[3] The benchmark used in the Data Analysis is ISHARES MSCI ACWI ETF as a proxy of the MSCI World Net Total Return (in Euro).}

^{[4] CRR is based on a scale of 0 (very poor performance) to 100 (excellent performance) and allows to categorise companies according to their carbon-related performance into four groups: Climate Laggards, Climate Underperformers, Climate Performers, and Climate Leaders. For more details, please refer to Appendix.}

^{[5] The GHG emission pathway and carbon budget of the Portfolio are the result of the aggregation of company-level data. The GHG emission trajectories at the company-level include both historical (i) and forward-looking indicators (ii) to project the emission intensity profile of a company from now until year 2050:}

• ^{The scenario analysis utilises 5 years of the ISS ESG historical, high-quality emission intensity data to create a trend for each company included in the analysis.}
• ^{The historical trend is then combined with forward looking emission reduction commitments and targets to estimate future emissions.}

^{For a specific company to be in line with either the 2°C, 4°C and 6°C climate scenario, the allocated carbon budget per year need to be higher than the estimated direct emissions for the same company. The emissions and carbon budget at the company-level are then aggregated to get a Portfolio 2°C, 4°C and 6°C scenario alignment.}

^{[6] Further details on the methodology are reported in the Appendix.}

^{[7] Further details on the methodology are reported in the Appendix.}

^{[8] The benchmark used in the Data Analysis is ISHARES MSCI ACWI ETF as a proxy of the MSCI World Net Total Return (in Euro).}

^{[9] CRR is based on a scale of 0 (very poor performance) to 100 (excellent performance) and allows to categorise companies according to their carbon-related performance into four groups: Climate Laggards, Climate Underperformers, Climate Performers, and Climate Leaders. For more details, please refer to Appendix.}

^{[10] The GHG emission pathway and carbon budget of the Portfolio are the result of the aggregation of company-level data. The GHG emission trajectories at the company-level include both historical (i) and forward-looking indicators (ii) to project the emission intensity profile of a company from now until year 2050 :}

• ^{The scenario analysis utilises 5 years of the ISS ESG historical, high-quality emission intensity data to create a trend for each company included in the analysis.The historical trend is then combined with forward looking emission reduction commitments and targets to estimate future emissions.}
• ^{For a specific company to be in line with either the 2°C, 4°C and 6°C climate scenario, the allocated carbon budget per year need to be higher than the estimated direct emissions for the same company. The emissions and carbon budget at the company-level are then aggregated to get a Portfolio 2°C, 4°C and 6°C scenario alignment.}

^{[11] Further details on the methodology are reported in the Appendix.}

^{[12] Further details on the methodology are reported in the Appendix.}

^{[13] For the Sovereign bonds portfolios two benchmarks are used: AMUNDI INDEX JPM EMU GOVIES ETF as a proxy of the benchmark JP Morgan EMU and the index Invesco Euro Government Bonds 1 – 3 Year UCITS ETF EUR Inav as a proxy of the benchmark ICE BofAML Euro Treasury Bill Index.}

^{[14] In the Sovereign Bonds section of this report, Figure 11 displays the “Sovereign Emissions Exposure” of the Portfolio taking Scope 1 & 2 emissions into account. The “Relative Carbon Footprint” is a normalised measure, defined as the total carbon emissions of the Portfolio per million EUR invested. “The Weighted Average Carbon Intensity” differs from the one calculated for non-sovereign portfolios because the GDP of the country is used instead of the revenue of the company.}

^{[15] Adjusted Enterprise Value is calculated as Total Market Cap + Total Debt. For non-listed entities where MCap is not available, total debt only is used.}

^{[16] For sovereign bonds the revenue is replaced by the GDP of the country.}

^{[17] The PCAF is a coalition of twelve Dutch financial institutions launched via the Dutch Carbon Pledge at the COP-21 Summit in Paris and is led by ASN Bank. The objective of this coalition is to develop a standard that enables financial institutions to set targets for carbon emissions and measure the extent to which these targets are achieved, which was presented in a December 2017 report (http://carbonaccountingfinancials.com/).}

^{[18] Data availability limits the implementation of the exact methodology in practice. Data scarcity consists of (i) lack of data based on the same sector classifications for emissions and for expenditure, resulting in inaccuracies when matching the two data sets; and (ii) lack of sector-based expenditure data for many countries, particularly developing countries.}