When a super fund’s portfolio includes investments in thousands of individual CO2-emitting assets, working out its carbon emissions is a real headache, even before the gnarly task of achieving decarbonisation targets can start.
Net-zero targets also can have a significant bearing on a fund’s investment strategies. In addition, if an asset owner has publicly committed to a target and has attracted new members to the fund, or retained existing members on the basis of those commitments, then the targets must be real, and an asset owner must be able to regularly report its progress towards the target.
Aware Super head of responsible investment Liza McDonald says the $190 billion fund is typical of Australian super funds, which invest in “all different sectors – in equities and debt, we’ve got derivatives, we’ve got sovereign bonds, we invest in every single asset class – and we’ve made commitments around net zero by 2050”.
“You need to understand what the baseline of your portfolio is to be able to then even track how you’re progressing against those targets,” she says. But also typically, Aware had limited line of sight to the carbon emissions of the assets it was investing its members’ money in – particularly in private markets.
Setting a high-level portfolio target is one thing, “what we also wanted to do was understand each sector’s emissions profile and set individual targets on the sectors in order to meet those overarching, high-level targets”, McDonald says.
Aware first set out to measure its portfolio assets’ carbon emissions in 2020. It faced a lack of basic data, and a lack of consistency in the data that was available, particularly for unlisted assets.
McDonald says in listed equities the task was significant but – relatively, at least – straightforward. Like most big investors, Aware used a data provider (ISS) – other funds use the likes of Sustainalytics and MSCI Climate Metrics – whose data McDonald says has improved considerably; and while “some of it might still be proxy data, we’ve got the methodologies, and so we can do listed assets very easily”.
“What we couldn’t get was data on property, infrastructure, fixed income and credit,” she says.
“There was not a globally accepted methodology for some asset classes when we started this, in terms of calculating emissions intensity – particularly how you would account for debt, because you would own the same company, and you’ve got debt and equity.”
Carve-outs
McDonald says Aware also had to carve out its derivatives, sovereign debt and fixed income holdings because there was no consistent methodology for how to calculate emissions in those asset classes either.
“But we had quite a large portfolio of private equity, infrastructure and property that we needed to get the emissions [data] for,” she says. And that portfolio was complex.
“As an asset owner we might have 20 different fund managers managing all of those different asset classes, some are direct, some are pooled. To get the data and the information of all of the underlying scope 1 and scope 2 [emissions] of all of the assets that we owned was a complex problem.”
McDonald says Aware’s first attempt at collecting the data it needed was a game effort but relatively rudimentary, too manual and took too long.
“We worked with Energetics, who assisted in developing a spreadsheet,” she says.
“They had worked with fund managers who have direct assets and could get their emissions for their portfolio assets fairly easily.
“But when it came to an asset owner, and the way that we actually are structured – that is, multiple asset classes, and how we have multiple different ways of ownership – direct, pooled) – there was no way to do it, so we worked with them in the first year, and it was all done via spreadsheets.”
McDonald says a master spreadsheet was created for each sector, reflecting different calculation methods in how emissions were calculated across the sectors.
“We sent that out to all of our managers and asked for all the data, and it came back in the spreadsheet,” she says.
“It was pretty manual and pretty time intensive. And having done that one year, we then went, this is not sustainable when we’ve got to track our emissions every year.”
A valuable middleman
A big part of solving the emissions data access and consistency problem for Aware, and for other asset owners, was the establishment of a middleman, in the form of a platform created to collect emissions data from investment managers and disseminate it in a timely manner and in a consistent format to asset owners.
For Aware, and for other super funds, that middleman is Pathzero, which links asset managers to asset owners to collect, calculate and share data. It works by requiring asset managers to upload emissions data to the platform, and then allowing asset owners who have hired those managers to pick up the data and use it to work out their portfolio carbon emissions, and measure their progress towards emissions targets.
Co-founded by Carl Prins and Charbel Ayoub, Pathzero was the overall winner of the 2024 AFR Most Innovative Companies awards, and was conceived to allow asset owners to get hold of emissions data for directly and indirectly held unlisted investments; calculate emissions at both an operating entity and fund level in, critically, accordance with PCAF standards; and to aggregate emissions data across portfolios for analysis and reporting, and for informing investment and engagement actions.
For asset managers linked into the platform the benefit is at least twofold: it keeps major asset-owner clients sweet; and there are efficiencies through being able to upload data once and have it distributed to many asset owners or other investors. As long as a manager keeps its data current and complies with the data-structure requirements of the platform, all of the asset owners it has as clients are able to access the data and aggregate it with data from other asset managers.
But Prins says it’s wrong to think of it as only a data solution.
“[It] isn’t a data service, it’s infrastructure,” he says.
“It connects asset owners, fund managers, and operating entities in a way that makes emissions data collaborative, traceable, and actionable. That’s what’s needed now – not just more data, but a better way to manage financial risk in a decarbonising world.”
Prins says that as little as five years ago asset owners had little choice but to “rely on high-level estimates or static data sets to understand the emissions profile of their private market portfolios”.
Now, however, he says they can “access disclosures directly from fund managers and even underlying companies, enabling true fund look-through and credible climate-related risk management at scale”.
“The asset owners that engaged early, like Aware Super, recognised that understanding emissions in their portfolios wasn’t optional,” Prins says.
“It was about protecting long-term value and staying ahead of incoming regulation. Today, they’re benefiting from a network effect that makes the disclosure process far more efficient, and they’re better positioned to manage transition and physical risks.”
The legwork an approach like this cuts out cannot be overstated, particularly for large funds like Aware.
“If you look at a private equity fund, we will be with a GP and we might be in fund one, two and three,” McDonald says.
“Within fund one, two and three, there could be anywhere between 10 to 20 companies or more in that portfolio and we will have fund-of-fund structures. And then we have 47 private equity managers.”
Greater confidence
McDonald says Aware now has greater confidence in in having a baseline from which to measure its progress towards its emissions targets, and a much clearer picture of where to focus its efforts in achieving those targets.
“There are probably thousands of companies in our PE portfolio, but when we look at the emissions profile there might be 10 companies that are the biggest contributors, and we didn’t know that before,” she says.
“That’s who we need to work with to get their emissions down, because that’s what’s going to contribute to us being able to get our emissions target. So it allows us to identify who we need to work with.”
McDonald says the existence of a robust technology platform acting as a conduit between asset managers and asset owners gives the executives and trustees of super funds greater confidence in public pronouncements about emissions targets.
“It’s absolutely more if we think about the fact that our directors have to sign off on the data that we’re putting out there, there’s a platform with a methodology that gives them more comfort that we can audit it, we can challenge it, versus using an Excel spreadsheet or relying on fund manager A telling us this,” she says.
“You’ve got that whole interface of data; there’s a check of all of the data. And then you go, ‘Yep, we’re happy with the data’. You close the data collection period, and go, ‘This is it; you can’t change the data anymore’. So it’s not like someone can then change their mind and go, ‘Oh no, it should be this’. So it’s that data collection done, and we know then what we’ve got.”
McDonald stresses the work on collecting, verifying and acting on emissions data is not finished. It still has to solve the issue of how to seamlessly integrate data from the PathZero platform with the fund’s internal systems (Odin), so it can be factored into investment decisions and reporting.
“But compared to working on a spreadsheet, it’s been a brilliant step,” she says.
