Organisation: AlbaCore Capital Group
Signatory type: Investment manager
HQ country: United Kingdom
COVERED IN THIS CASE STUDY
Asset class: Fixed income
AlbaCore Capital Group is a London-headquartered specialist investor focusing on public and private corporate credit markets. We have introduced a solution to provide transparency on a portfolio’s estimated carbon footprint, which we call Carbon Conscious Investing (CCI). CCI share class investors are provided with quarterly and annual reporting on the estimated carbon footprint of the portfolio as a whole as well as on a line-by-line basis. The resulting methodology and reporting have been reviewed by a third-party advisor.
Private companies frequently lag public companies in terms of providing carbon disclosures. To mitigate the lack of disclosure, we have developed a proprietary peer-mapping model and methodology. This allows us to estimate the portfolio’s carbon footprint, including in scenarios where issuer data are not available. Once we estimate the carbon footprint of the portfolio, we calculate what we term ‘carbon-adjusted returns’ by ascribing a range of carbon prices. We then convert that into basis points of annual return to help standardise and compare across different funds.
Why this approach?
The first step towards mitigating carbon emissions within the portfolio is quantifying them. Where there is a lack of carbon data for parts of the portfolio, we have adopted an approach to estimate non-disclosed carbon footprints by using reported carbon data of peer companies.
AlbaCore’s CCI employs a peer-mapping model where the investment analysts map each portfolio company to the relevant peer company based on factors such as business operations, geography, scale, and revenue. The peer-mapping model allows the analysts to rank the peers as direct matches, close peers, or distant peers and to take a weighted average approach to arrive at the estimated carbon footprint of the portfolio company.
We report in line with the Partnership for Carbon Accounting Financials (PCAF) standard to provide investors with comparable carbon metrics. We report the ‘best estimate’ of the total carbon emissions of the portfolio, which is then attributed to the fund’s share of ownership. The assumption we make here is that we have held all the live investments for the whole year. The industry standard PCAF methodology allows investors to measure the carbon footprint of a portfolio at a given point in time, but it does not take the investment’s holding period into consideration.
We believe that to account for the real impact of the portfolio in terms of carbon emissions we need to take into account the holding period of the investment. Keeping this in mind, we developed our model to also incorporate a time component to reflect a more dynamic approach to carbon estimation in a given period. We also report the time-weighted carbon footprint of the portfolio. We first report the best estimate of the actual carbon footprint of the portfolio based on all investments made by the fund in the relevant period. We start with calculating the weighted average hold period, which takes into account the approximate number of days we held that investment in the fund within the period under consideration. The weighted average hold period is then applied to the sum of Scope 1 and 2 emissions of portfolio companies, which is then attributed to the portfolio’s share of ownership based on the percent of the enterprise value (EV).
The approach in practice
As a credit manager investing in private names, we believe a lack of carbon data has hindered asset managers within the asset class, causing them to lag behind managers who operate in public markets (i.e., listed equity), where there is more data available to make portfolio allocation decisions.
Through our model, we have calculated several metrics that we believe will help investors integrate carbon footprint estimates into the risk management and investment processes. Along with calculating the Weighted Average Carbon Intensity (WACI) of the portfolio, we are also able to provide investors with insights into which types of investment are contributing to the portfolio’s overall WACI. In addition, we include this data illustration of contributions to the portfolio’s WACI (in tonnes of CO2e/US$1 million sales) alongside the share of the portfolio’s total estimated carbon footprint. Calculating the portfolio’s WACI helps improve investors’ understanding of the portfolio’s exposure to certain climate risks on a sector-specific basis as we move towards a lower-carbon world.
We are able to decompose the portfolio by the total carbon intensity of each of the sectors within the portfolio irrespective of that sector’s portfolio weight. This method allows for a comparison of AlbaCore’s sector-specific carbon intensity to another portfolio’s sector carbon intensity, helping investors identify carbon-intensive sectors within AlbaCore’s portfolio.
We believe the direction of travel amongst managers, investors, regulators and ESG data providers should allow these types of specific, detailed reporting to filter through the financial system, from allocators measuring their quantifiably carbon-adjusted returns eventually to portfolio company management teams enacting operational initiatives based on very clear cost/benefit analysis. If investors can communicate the effect of ESG factors, specifically environmental in annualised basis points or percentage terms, portfolio company management teams can root in their operational ESG decision-making on the basis of potential cost of capital savings.
We believe it is our responsibility to provide investors with both the estimated annualised carbon footprint of their portfolio on a time and capital-weighted basis, as well as hypothetical ’carbon-adjusted returns’ of their portfolio performance.
While carbon disclosures by private enterprises lag behind large public entities, we aim to account for these emissions even when our portfolio companies do not disclose them. We hope to see more disclosure as a result of incoming regulations such as the EU’s Corporate Sustainability Reporting Directive (CSRD), the UK’s Streamlined Energy and Carbon Reporting (SECR) and the SEC’s climate disclosure requirements. We believe the benefit of the CCI model is to help estimate the carbon footprint for our portfolio companies as a placeholder until disclosure improves.
Through our CCI model, we have been able to measure and report the cost of an environmental externality. For CCI to influence decision-making we need to drive further industry adoption by capital market participants who can help shape portfolio companies’ policies and practices. We intend to further engage with experts, advisors, and peers within our industry to progress disclosure and promote greater transparency on portfolios’ carbon footprints.