Climate Data and Investment Report
The CFA Institute Research and Policy Center releases a report on climate data and investment, which aims to analyze how climate data is used in the investment process and the challenges faced in applying climate data.
CFA Institute believes that investors are learning about the risks and opportunities related to climate change to analyze how climate change affects asset values. Having accessible, reliable climate data is an important factor in measuring these risks and opportunities.
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Climate Data in the Investment Process
As sustainable investing strategies continue to expand, climate data is already being used in many directions. For example, credit rating agencies incorporate the climate risks faced by companies into their rating processes, index providers launch climate-related thematic indexes, and analysts incorporate climate information into their analytical frameworks. Applying climate data to the investment process can not only assess asset values, but also set shareholder engagement goals and meet investor preferences for low-carbon investments.
CFA Institute found in a previous survey that 72% of respondents believe clients are asking them to provide more climate change analysis and consider climate change more in investment products. However, 46% of respondents are concerned about the lack of available, reliable climate information, which could impact progress towards net zero.
Challenges with Climate Data
Many jurisdictions currently lack climate disclosure obligations, so investors may obtain climate-related information from multiple sources. These sources include company disclosures, corporate communications, industry organizations, third-party data providers, and more. For example, thousands of companies around the world disclose climate-related information to CDP every year. These sources make it difficult for investors to obtain comprehensive and reliable data.
Climate data can generally be divided into three types: raw data, processed data, and analyzed data. Raw data is the company’s own batch data, which may vary due to company differences in data definition, measurement, calculation, and disclosure. MSCI research finds that larger companies generally have more resources to address disclosure issues. OECD research suggests that emerging market companies and private companies often lag in greenhouse gas disclosures.
Processed data can fill disclosure gaps and provide investors with a more complete set of information. For example, data vendors may estimate undisclosed Scope 3 data. It is more expensive for investors to process the data themselves, so they obtain this data from data providers. However, many data providers have difficulty ensuring the reliability of the information, and the assumptions and estimation methods used in some calculations are not publicly disclosed. These errors may lead to increased climate risk exposure in investments.
Analyzed data refers to data that has been collected, processed, aggregated, and used to make judgments and provide opinions. These figures are calculated using a variety of methods, such as ESG ratings. The problem with these analyzed data is that their transparency and comparability are ignored. Some regulators have taken note of the issue and are issuing voluntary codes of conduct for ESG rating agencies.
How can Investors Use Climate Data
Although regulations and standards related to climate data are constantly taking effect, there is still some distance to go before mature and complete climate data. Due to differences in materiality, information audience, information location and other factors, it is difficult to achieve global consistency in climate data information disclosure. Investors therefore need to make effective use of existing climate data and be aware of their limitations.
CFA Institute recommends that investors use data interpretation and checking techniques to increase the credibility and usability of the data as much as possible by cross verifying the data with the original data source. Investors can also participate in the data standards development process to improve climate data and encourage the establishment of high-quality disclosure standards.
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