Transparency is the New Black

by Malcolm Harris, Senior Advisor ESG, RS Metrics

This Earth Day, we were again reminded of the gargantuan challenges we are facing as we attempt to deal with the impacts of climate change. In addition, the public is becoming increasingly aware of the effect that industry has on the planet beyond emissions — including land use, biodiversity, water stress, and other issues. The good news is that investors, who are a crucial part of driving positive change, have really started realizing what the nature of the challenge is and are trying to tailor their capital allocation accordingly.

However, as they say, if you don’t measure it, you can’t manage it. One challenge for stakeholders has been how to pinpoint and measure the environmental impact of their assets. For example, emitters have frequently relied on estimates rather than direct measurement due to the high cost of active monitoring. And disclosures (if at all) have been limited to annual sustainability reports, leaving investors with only a highly summarized (at company level) and time-lagging set of numbers to work with. In the age of digital and big data, this approach seems highly antiquated and almost ridiculous.

While comparisons are frequently made between the development of SEC accounting standards in the 20th century and the development of ESG standards in the 21st, geo-spatial technology and data science take ESG’s advancement to another level. Imagine if, instead of waiting for a company’s cash flow statement, you had direct access to their bank accounts. That would surely have helped Wirecard investors!

Likewise, alternative data, and, in particular, remote sensing, means investors no longer need to wait for corporate disclosures. Instead, they can monitor asset-level environmental performance, in real-time, across dimensions like emissions, land use, biodiversity, and water stress. Investors can do this proactively, eliminating dependence on quarterly or annual corporate disclosures. In other words, investors are no longer at the mercy of how management chooses to measure their environmental impact, nor what or when management decides to disclose.

Combined with other sources of data, this is an incredibly powerful tool for investors to assess the environmental performance, and therefore the risk embedded within their portfolio. This helps protect investors’ portfolios in two ways: by measuring progress toward climate goals to mitigate stranded asset risk and by monitoring for asset-level physical risk.

From a climate perspective, it is easy to see how this can drive substantial progress. Companies know that they can no longer hide their environmental performance, whether publicly traded or not, so they are motivated towards environmental progress. Investors now have the tools to measure risk and progress so they target their investments to improve targeted environmental metrics. What can be measured objectively and externally will certainly be managed.

Utilities as a case study for comprehensive monitoring (Emissions +)

Utilities are a great example of how this technology works for investors. Utilities are one of the largest emitters of emissions globally and are also vulnerable to physical risk from the effects of climate change at their plants and across their transmission and other infrastructure. Beyond emissions, they have significant challenges with land use and biodiversity impacts and are facing rapidly growing threats to their business model from electric vehicles (EV tracker hint hint) and distributed generation.

PG&E example

The PG&E bankruptcy provides a perfect example of the impact that climate change has on investors and other stakeholders. After years of drought led to an increasingly dry and stretched ecosystem in 2018, faulty PG&E equipment caused the deadliest and most destructive wildfires in California’s history (see RS Metrics’ use case on the Butter County camp fire here). PG&E ultimately pleaded guilty to causing this disaster and was forced to file for bankruptcy.

Ironically, risks of this nature were disclosed by PG&E in their annual reports. In fact, the utility was already being sued about a 2015 fire that Calfire determined to have been caused by PG&E’s power lines. In addition, the PG&E disclosed that it was making “substantial investments to build a more modern and resilient system that can withstand extreme weather and related emergencies” (Source).

Despite this disclosure, investors were wiped out. This is especially notable given that data available about PG&E is higher than in most jurisdictions due to stricter California regulatory requirements on reporting things like emissions. With only investor disclosures and assurances from management to rely upon, investors had no way to efficiently drill into PG&E’s operations and understand the risks to their investment.

The rise of remote sensing technology has changed all this. Satellite and other alternative data sources allow investors to peer into a company’s operations and objectively measure exactly what that company is doing. If investors are worried about emissions, they can see how the company is performing at an asset level with no need for reliance on company disclosures. Same goes for other risks, such as wildfire. A savvy PG&E investor or insurer, aware of the California climate context and the specific climate risks, could have actively monitored PG&E physical risks and tailored their investments accordingly.

It is not only investors who can actively benefit. Monitoring emissions, land use, physical risk etc. is costly and time consuming. Remote sensing can be a far more efficient way of doing company activities that does not involve sending crews out to sites to monitor and record data. Platform-as-a-Service Providers can tie data feeds directly to companies operations so that they have frequent updates on the environmental status of their operations, allowing them to make better decisions more quickly through the use of a customized platform. And, of course, doing so allows corporates to tell a better story to investors, making them more attractive capital destinations as both passive and active capital flows are increasingly guided by climate and ESG considerations.

Platform-as-a-Service model for investors and corporates

The power of this model is obvious, especially when delivered via a Platform-as-a-Service model. Investors, insurers, and corporates can all access the same objective third-party data feeds to get actionable real-time asset-level data which can guide investment decisions by corporates and investors. Corporates can invest towards resilience and improved environmental performance, while providing proactive assurance to investors, regulators and other stakeholders. Likewise, investors can proactively track progress at an asset level, irrespective of disclosure regime or reporting methodology.

Malcolm leads technology driven efforts to cut both costs and emissions across Chevron’s global real estate end environmental operations. Previously, he led Chevron’s global outlook on carbon pricing and climate policy, as well as projects in areas like green finance, policy advocacy and emissions reduction strategy. He’s also held roles in California Downstream, mergers & acquisitions, and corporate treasury. Malcolm is an Army veteran with two tours of Iraq. He holds an MBA in finance from Columbia Business School and and undergraduate degree in physics from the University of Virginia.

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