Marine Dehayes, Senior Project Manager at Climateworks Australia, wants finance to contribute to climate action. She’s been working on the country’s first forward-looking climate index, the Australian Climate Transition Index (ACT Index).
‘Most of the current opportunities for investing green,’ Marine says, ‘depend on indicators looking at the past – or, at best, the current – emissions and other key climate indicators of a project or company. Based on that history, a company gets judged if it is green or not, if it is worthy to be in an index or be financed by green investors. But the past doesn’t necessarily tell if you’re supporting something that will be green in the future. It doesn’t tell you anything about climate mitigation strategies and adaptation to new market demands, for instance. There has been no simple way for investors to support companies taking a positive approach going forward.’
The ACT Index – created by BNP Paribas with Climateworks Australia, ISS ESG and the Centre for Quantitative Finance and Investment Strategies at Monash University – fills that gap.
The Index works by using sectoral data from dynamic climate scenarios and information about companies’ mitigation efforts, regularly adjusted to reflect changing context, disruptions and companies’ new disclosures – a process replicating the sorts of judgements climate-conscious investors might make on their own behalf.
Companies are listed if they make it among the top 100, assessed according to key questions devised jointly with ISS ESG. Analysts perform a quantitative assessment to determine the extent of a company’s involvement in high risk activities or promising green products and services and their exposure to risks associated with carbon pricing or reputation. They also undertake a qualitative analysis, focussed on how companies are managing those material risks and preparing for new opportunities.
The method looks at the current exposure of companies, both in terms of what they do and how they do it. Are their products and services at threat in a low-carbon scenario? What about their operations? It examines their approach to mitigation on the same basis. Is the company committed to reducing exposure to risk and to developing green products and services? Do they have plans for reducing operational emissions?
‘It’s not all about being emissions intensive or not being emissions intensive,’ Marine explains. ‘Some sectors are needed for the transition. For instance, some mining companies that will provide the materials that will enable us to do more with renewable energy. They’re needed and will facilitate the transition. But that can only be identified thanks to scenarios. The climate scenarios we develop at Climateworks tell us which sectors are going to face fewer or greater demands in a world shifting to a low carbon economy.’
In drawing up an index of enablers (companies providing products or services required in the new economy), adaptors (companies well placed to evolve) and the least affected (companies already compatible with a low carbon future), the project uses the research undertaken for Climateworks’ important Decarbonisation Futures report. It models five Paris-aligned climate scenarios for Australia (including a 1.5 degrees transition) across all sectors of the economy.
Every six months, new scores are calculated, taking into account shifts in a company’s activities, market cap, carbon emissions, mitigation approach and decarbonisation strategy. The methodology acknowledges the significant diversification of some of the companies in the ASX300, including those involved across multiple sectors.
Though financially independent from the index’s performance, Climateworks will continue to provide scenario data and oversee improvements to the scoring process improvement. The system itself is designed for constant updates and improvements, as the transition unfolds across Australia and the world.
‘What enthused me about this project,’ Marine says, ‘was developing that methodology to actually score companies. It was an exciting opportunity to work on because it is a pretty difficult exercise.’
The ACT Index plays an important role in ‘Project Green Kangaroo’, a collaboration launched by the French bank BNP Paribas.
‘Green Kangaroo was its code name,’ Marine laughs. ‘And I don’t know how, but somehow it actually just stayed!’
BNP has recently issued A$140 million of innovative ‘green bonds’. Where the bank’s previous products – such as the European equity-linked green bonds issued in 2015 – could only assess the past, the ACT Index analyses the future, allowing BNP to invest in companies positioned for performance in the emerging low-carbon economy.
It’s an illustration of what the methodology behind the ACT Index can do: how it can provide an opportunity for investors to look forward rather than backward.
According to a recent study, 90 per cent of investors surveyed in Australia and New Zealand saw a lack of opportunities with appropriate risk and return factors as the single largest inhibitor to growing green investment.
The ACT Index provides a foundation for such opportunities to emerge.
‘I’m very excited by the end goal of this project,’ Marine says. ‘I’m very excited that, eventually, investments can be directed towards the companies that are the most supportive of the climate transition.’