Setting the Standard for Corporate Climate Data — An Interview with Robin Rouger About His Forward-Looking Climate Scenario Engine
The financial industry has an issue with climate data. Even though we’ve come a long way the past decade, we still rely on sub-optimal data when assessing how companies perform in relation to climate. Are they reducing emissions as promised? Are their efforts in line with the climate pledges made in the Paris Agreement?
It’s extremely hard to tell, for many reasons. First of all, the numbers are self-reported. We still don’t have a trusted 3rd party verification system when it comes to reporting of climate-related numbers.
Another issue is that we need to take the context of each company into account, and it’s not easy to score companies on the same scale across countries and industries. For example, you could argue that an oil major that is changing its course for the better is more admirable and has a bigger net positive effect than a company that is born ‘green’ but is now resting on its laurels.
So we have a data problem. Or to be more precise: We have a problem with ESG data.
Depending on how you measure, companies are sometimes scored very differently. And, even more alarming, you could argues that ESG data is not capturing real-world impact, as I wrote about in my newsletter recently.
Luckily, things are progressing. And I feel really blessed to be working with someone like Robin Rouger who’s making a mark in this space.
Since he started working with us a little more than a year ago, he has been trying to develop a new model to score companies and estimate their climate scenario path in relation to the Paris Agreement.
Month by month, his model — what we refer to as a “forward-looking climate scenario engine” — has improved, and it has now reached a stage where we can say that it’s a cutting-edge piece of work that is setting the standard in the industry.
That’s a giant accomplishment, and it’s very important work. Not least when you consider that the financial industry and how money is invested plays a key role in solving the climate crisis. And that the lack of good ESG data is the no. 1 thing holding us back from getting things done and pave the way to a sustainable future.
A couple of concrete outcomes of Robin’s work seem in order. First, here’s the climate trajectory of Amazon, which I also included in my ESG analysis of the retail giant. As you can see, Amazon is on a 4-degree Celsius path, far away from where it should be.
Secondly, here’s the climate trajectory of Facebook. This one I’ve also shared before, in my ESG analysis of Facebook. In regards to climate, Facebook is doing an astonishing job, and the company is on a below 1.5-degree Celcius path and well track to meet the targets set in the Paris Agreement.
I wanted to know more about Robin’s work, and share it with the outside world. So, I sat down and did an interview with him.
Here’s a transcript of that interview, edited for clarity and length.
Sasja Beslik: Hi Robin. Thanks for agreeing to do this little interview. First of all, can you tell me a little about yourself and what you do?
Robin Rouger: Sure. I’m 30 years old and I’ve been part of the Sustainable Investments Team in J. Safra Sarasin since August 2019. I’m in charge of developing a climate process for all our sustainable funds.
SB: You’ve developed this “forward-looking climate scenario engine”, I think we can call it. What is issue with current climate data available in relation to investments?
RR: First, let’s be clear that — despite what people think — banking is undergoing a transformation and is using more and more non-financial data. We see a willingness of investors to contribute to a more sustainable world and to give an extra dimension to their savings, and in order to fulfil this demand financial players are using more and more data to make investment decisions.
The difference between climate data and traditional financial data is that climate data are based on future considerations and are not reported observations. They are based on key assumptions that are themselves based on scientific hypotheses.
The majority of climate data depends on the progress of scientific research and can therefore be volatile. It’s a field that is developing and they do not yet convincingly integrate the score of 3 and are currently limited to the level of companies, and not to the level of countries.
For climate trajectory calculations, there is no common framework and everyone can therefore set up their model according to their understanding of the subject.
A study recently came out which showed that there’s inconsistency between the ESG scores of the major data providers. They are not the same. It raises important questions about the quality of the hypotheses.
Meanwhile, a new framework developed by the EU Taxonomy is under advanced discussion.
The EU Taxonomy is a tool to help investors, companies, issuers and project promoters navigate the transition to a low-carbon, resilient and resource-efficient economy. It can be used to identify companies with green revenues and will provide a common precise framework.
This framework will most likely be able to help investors identify companies that are participating actively to the climate transition.
Unfortunately, there are no data providers who can fully collect those green revenues.
SB: Why is climate data relevant for investments?
RR: Each year, the World Economic Forum identifies publishes a global risk report. In that report, before COVID-19, they’ve identified a “pandemic” as highly probable. But also of far less consequence than a failure of the energy transition.
It says a lot about the magnitude of the transition. We know that one day global warming will have a huge impact on our ecosystem if we do not change anything. We have already consumed a large part of our carbon budget to be in line with the Paris agreement.
Companies presenting innovative solutions to face the increase of greenhouse gases will benefit from an interesting strategic positioning and should have more and more orders. EU subsidies are already in place to help companies that move in this direction.
This is where climate data is really interesting for investors. Climate data provides a major opportunity to identify companies that will have an increase in sales and therefore certainly have an interesting stock market rally.
At the same time, climate data also allows us to limit certain risk like controversial activities, potential physical risks, carbon regulation risks etc. Companies that are lagging behind in these areas will see their costs increase and be penalised by investors.
SB: Can you describe your thinking when you developed the “forward-looking climate scenario engine”?
RR: The idea was to find companies that are in line with the Paris Agreement. Essentially, the Paris Agreement says that we need to limit CO2 emissions by a certain amount before 2050 to limit global warming to 2 degrees.
We therefore sought out all the data providers and listened to their methodologies in order to the one with the most convincing, clear and transparent approach. We decided to go with one that was based on concrete factual events that were in line with the NDC (Nationally Determined Contributions) objectives set by the states.
The forward-looking view on things allows each company to have an idea of how much CO2 needs to be reduced in order to reach different climate scenarios. Companies need to ask themselves: “Are we in line with the climate targets? Are we a part of the problem or a part of the solution?”
Of course, a company operating in an energy-intensive sector will have to make a bigger effort than a health care company for example. In order to define whether a company will be able to meet the Paris Agreement, we look at whether the pledge targets set by the management are ambitious enough.
In addition to this we wanted to counter the greenwashing phenomenon. To rule out companies that are greenwashing, we look at the past carbon emissions of each company and analyse if they are in line with the objectives set.
Our thinking is that since climate change is not new, a company with a real desire to align itself with the Paris Agreement will already have put in place concrete measures to increase its energy efficiency. Action speaks louder than words.
We’ve also added a carbon score that reflects how much the energy transition is on the agenda in the company’s decision making.
We are also attentive to companies that produce services and solutions to help others reduce their carbon emissions. To do so, we follow the recommendations of the taxonomy to define green revenues.
However, we have a mechanism that allows us to separate the revenues of companies in green activity. We can then find similarities with the taxonomy and arrive at a percentage of green revenue. For missing data, we do the work case by case, keeping the Taxonomy as a guide and store the results in a database.
Of course, a lot of assumptions have to be made in order to arrive at our final result.
Nevertheless, our tool allows us to identify both companies that have strong objectives — in line with what they have shown in the past and necessary to reach a 2 degrees scenario — and companies with a strong focus on the implementation of new solutions to limit greenhouse gas emissions.
SB: What does this engine do for portfolio managers?
RR: For traditional portfolios, it can be used to calculate the positioning in relation to the Paris Agreements in comparison with its benchmark. It allows the portfolio manager to make arbitrages to propose a portfolio in line with the Paris Agreement.
We are currently thinking about the impact in terms of CO2 avoidance that we could have compared to a traditional index to put a figure on our investments.
We can also calculate our exposure to the physical and climatic risks associated with our investments and act accordingly but also position ourselves in terms of climate opportunities.
For a portfolio that focuses on the climate theme, it allows the portfolio manager to be in line with the standards in the discipline.
SB: How did you construct this engine?
RR: As I mentioned, we had conversations with many climate data providers. We had to challenge them and understand their assumptions in order to choose a good one.
We decided to work with Carbon Delta because they are constantly innovating in this area. We think their approach is interesting because it takes as a starting point the data coming from the scientific community in terms of the CO2 budget and also starts from what the country is trying to put in place to reach the Paris agreement objective.
For each company, depending on the location of its facilities and its revenue exposure, it can deduct a percentage reduction in carbon requirements to achieve different temperature scenarios. They also have an interesting approach to assess the climate VAR for the whole company on different dimensions.
Then, we use a quantitative algorithm based in Python, VBA and SQL to aggregate all the climate data and build our climate engine. The only problem is that we don’t know exactly how to verify our results. Everyone claims to have a solid process and to evaluate a good trajectory.
The only certainty I have is that we have taken all possible elements to avoid the probability of being wrong. When data is missing or when we have to make assumptions, we always use a cautious approach to avoid greenwashing.
SB: How long did it take you to develop this engine?
RR: Hmm, that’s a tricky question! In terms of hours spent I simply don’t know, but a lot! I started working on it when I joined the bank in August 2019. The first tangible results were there in December 2019. But then we’ve continued working on it, and we still are. And of course, we work closely with our data provider on all of this.
At the same time, we also look at other available data — like SBT data or other external data — that could be useful to make our calculations more precise. And since we are a bank we of course also take into account what our clients are looking for and integrate that in our process.
SB: What is still missing?
RR: The main thing missing is data at a general aggregate level. For example, so we can accurately quantify the climate trajectory at a country level. As it is today, we sum up the numbers from all the companies that are operating in that country.
That number in itself is interesting and very telling, but it does not include the private companies, only public companies. Data engineers are working to solve that issue. It would be useful for fixed income/government bond portfolio.
A revenue spilt in line with taxonomy is also something that is still missing. When we get that, it will be a major change because it will enable us to evaluate the companies on a common basis. A level playing field. Given the interest in that topic, all the big data providers and startups are currently working on that too.
Another thing missing is that the NDCs are not entirely filled by all the countries. And even if the coverage is bigger and bigger, some companies still haven’t defined their carbon objectives.
Finally, it would be great if there was a trusted carbon emission audit company. It should be independent. And we would use that to verify if the self-reported data displayed by the companies are “clean”.
SB: When will we able to have solution that is covering all aspects of climate impact caused by companies?
RR: Well, I don’t have a crystal ball. But since there’s a lot of people asking for climate data, the pressure is growing, and If I had to bet — and again it’s just my personal view — I think we will have proper set of data within the next 2 years.
But you never know. And until we get there we will put lot of efforts into building something really robust.
SB: What drives you to do what you do?
RR: I am part of this generation that wants to make a difference. You know, unlike the majority of people who work in investment — no offence — I will certainly still be here in 2050 to see if we have managed to solve the climate equation.
I have the privilege to be able to try and solve major societal problems while staying in a sector that I am passionate about.
I am deeply convinced that finance has a major role and responsibility in meeting this challenge, by redirecting our capital towards companies that offer real solutions to build a cleaner and sustainable future.
I am also convinced that the climate issue will be a growth driver in a world affected by a major health crisis. The green deal is a step in this direction, showing that the leaders have a real desire to change our energy consumption patterns, and we understand that global warming is not just a story for children.
Capital inflows in responsible funds and in the climate thematic ones have exploded since the beginning of the year, demonstrating that customers are looking for this type of vehicle. To meet the demand of our customers, and to make them benefit from our expertise in this area, it is important to build this kind of investment process so they can invest in relation to the issue of global warming.
