In this article, we talk about using data products for tracking carbon emissions and continuously monitoring the correlation between carbon emissions and associated financial performance and risk management and sustainability reporting.
Regulatory and NGO-driven pressure is increasing on financial institutions, and the institutions are expected to report on their carbon emissions, associated financial performance (Scope 3, Category 15), risk impact (e.g., earnings at risk due to carbon emissions), and progress of their sustainability objectives (e.g., reduction in carbon emission intensity – Paris Agreement).
What is a data product?
A data product is a detailed representation of a company’s “on-the-ground” business operations, designed to produce a specific outcome based on business logic or data transformation. As organizations are becoming more digitally integrated and adopting cloud-first principles for new capabilities, data products are becoming the “go-to” enabler. They enable the delivery of modular capabilities that can be governed, managed, and enhanced within the respective business domains while also enabling the reuse of existing data capabilities across the enterprise.
We believe data products are the enabler of choice for all three categories, or “scopes,” of carbon emissions:
Scope 1 includes direct greenhouse gas (GHG) emissions, which are emissions from sources that are owned or controlled by a business entity.
Scope 2 includes indirect GHG emissions, which are emissions from the generation of purchased energy consumed by the entity.
Scope 3 includes other indirect GHG emissions, which are emissions generated by activities not owned or controlled by the entity, such as investments or partnerships.
Recent SEC guidance1 to enhance and standardize climate related-disclosures strengthens the case for a structured data taxonomy that can report numerous financial and risk aspects of carbon. Carbon data products will enable the development of this taxonomy which can be used to develop an internal price for carbon as well as the metrics for measuring the impact of emissions. It can also help create consolidated financials and aid in climate scenario analysis.
The SEC guidance also recommends that institutions conduct economic analysis to assess the economic costs of climate change, and its effect on efficiency, competition, and capital formation. Performing a comprehensive analysis will require carbon data products to be leveraged with finance and risk data products.
To ensure they have a trusted and unified view of carbon emissions, financial institutions will need to develop data products with capture and curation capabilities from a wide range of data domains. Currently, companies are highly dependent on third parties for emissions data. While these organizations have made valuable contributions in advancing ESG investing globally, it’s important for lenders, asset owners, and managers to develop data capabilities within their own enterprise to fully understand their carbon footprint and its impact. The third-party data is best used for benchmarking or as a proxy when data from the true source is not available. Additionally, financial services institutions will require data products to baseline and tailor target setting methodologies for Scope 1, 2, and 3 emissions as per the Science Based Target initiative (SBTi).
The spectrum of data domains required for quantifying the carbon footprint of an organization is wide and complex. Data products are the best answer for this, because they can capture the data formats, frequency, and business relevance for each source of emissions as well as the target setting rationale in an organization.
View the PDF to see the numerous data domains that are required for developing carbon data products that can track and measure carbon emissions and their impact.
Carbon data products enable integrated reporting and analytics
It’s important to have a dynamic reporting capability to meet the objectives of numerous ESG governing bodies and to track progress on internal priorities such as pay equity and racial equity and providing financial products in underserved communities.
A carbon data product-based approach will help develop an integrated, curated, and controlled information management ecosystem to support:
- Regulatory and statutory reporting
- Management and shareholder reporting for sustainability objectives
- ESG disclosure reporting
- Climate and investor reporting
- Cross-functional reporting and analytics for sustainability and financials
- Alignment to PCAF and SBTi framework and methodologies.
There are pitfalls to be aware of, however:
- Avoid “as-is” use of third-party data. ESG data providers develop their own sourcing, research, and scoring methodologies, so it’s critical to rationalize the external data for the way you plan to use it.
- Adopt a “data management by design” approach for the carbon data products. Correlation among various data sets is not self-evident, as the ESG data universe comprises structured, semistructured, and unstructured data. Built-in cross-referencing capabilities across these data products will help show “cause and effect” and a provenance view of emissions data.
- Mitigate the lack of transparency and trust in a proprietary ESG information management approach. When developing ESG data products, in-process data management controls and accurate metadata makes it easier for both internal and external consumption.
Bringing it all together using a data mesh architecture
As organizations are becoming product aligned, leveraging modern architecture patterns like data mesh can be very advantageous in delivering integrated carbon-finance-risk information management and analytics. This approach can deliver trust and quality. Data mesh architecture also offers the following:
- It is agile to meet the fast-evolving ESG data and analytics needs tailored to specific business requirements.
- It supports industry-specific configurations to accommodate mapping, enrichment, and analytics across lending and investment assets.
- Its built-in “trust interface” provides continuous governance and controls for investor, regulatory, and other market-facing reporting.
- It is aligned with cloud-first and digital integration principles that allows this integrated information management capability to be delivered seamlessly across the enterprise.
For a view of how data mesh architecture can support integrated carbon-finance-risk information delivery and analytics, download the graphic.
At a time when ESG requirements are likely to add complexity to your existing front-, middle-, and back-office operations, it’s good to know there is an approach that will mitigate that complexity. Data mesh patterns will make it simpler to operationalization and maintain your new sustainability information management capabilities.