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There has been an explosion of terms, initiatives and acronyms over recent years as climate change has risen to the top of the agenda, accompanied by confusion between concepts such as ESG (‘Environmental, Social, Governance’), ‘sustainability’ and ‘net zero’. There is confusion about what these acronyms and terms mean, who is involved and how they all relate to each other.
Icebreaker One is working to enable net zero data to flow, and in doing so, help to bridge the gaps between organisations, initiatives and their outputs. We have a common goal to make data more discoverable, accessible and usable to support net-zero decisions.
In many conversations, we find there is a lack of clarity about what is happening, who is involved and how things are evolving in a highly diverse and complex ecosystem.
The aim of this post is to shed light on “What is going on? Who’s who and what’s what?”.
With a bias towards sustainability finance within the UK and the EU (and this is by no means exhaustive) we highlight some of the significant actors, acronyms and activities currently in motion as the world scrambles to achieve net zero by 2050.
Climate disclosures and frameworks
Part of the commitment by the EU to limit and neutralise carbon emissions (European Green Deal), the SFDR (Sustainable Finance Disclosure Regulation) is a broad ESG disclosure requirement for companies and products in the EU. It uses the language of the EU Taxonomy regulation, which provides the classification system needed to describe climate and nature-related economic and investment activities. For corporates, the EU’s Corporate Sustainability Reporting Directive (CSRD) lays out which organisations need to comply and what to disclose in order for more capital to be invested in climate-positive, sustainable and net-zero activities. The EU Sustainability Reporting Standard is being developed by the European Financial Reporting Advisory Group, EFRAG, which provides the technical expertise and guidance needed for the reporting standard.
Using input from discourse frameworks such as the globally adopted GHG Protocol for calculating carbon emissions (built on the Kyoto Protocol classification system of greenhouse gases), as well as TCFD (Taskforce for Climate-related Financial Disclosures, a global framework for disclosing climate risk and opportunities, which is now mandated by law to qualifying organisations) and TNFD (Task Force for Nature-related Financial Disclosures), which will provide a global framework that addresses risks and opportunities for the natural world and biodiversity.
Regulatory requirements and climate change law
A regulatory requirement since March 2021, SFDR forms a core pillar of the EU Sustainable Finance agenda, a pan-European policy objective to create a more sustainable future and reach the legally binding international treaty on climate change (the Paris Agreement), brought to the forefront by the scientific and socioeconomic analysis by the Intergovernmental Panel on Climate Change, IPCC. While the IPCC is an independent scientific, technological and socioeconomic institute formed by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP), the goal of the Paris Agreement is to limit global warming to “well below 2, preferably to 1.5 degrees Celsius”, compared to pre-industrial levels by countries to decarbonise their economies and reach net-zero emissions by 2050, many countries of which have now enshrined into law.
Standards Boards for disclosures
The current leading internationally adopted sustainability disclosure standard is from The Global Reporting Initiative (GRI), established in 1997 after the Exxon oil spill disaster to create more transparency and accountability around organisational activities and their impacts on the environments they operate in. More recently, the ISSB, the International Sustainability Standards Board, is creating a global disclosure standard for sustainable finance disclosures, published by the IFRS (International Financial Reporting Standards) foundation. It was formed through a consolidation of the IFRS foundation, the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) outputs. CDSB provided the foundation for FSB’s (Financial Stability Board) TCFD framework while the Value Reporting Foundation VRF spearheaded the Integrating Guiding Principles, Integrated Reporting Framework and the SASB (Sustainability Accounting Standards Board) standard. The International Sustainability Accounting Standards Board (IASB) is also working in collaboration with SASB (all under the ISSB banner) to drive forward the Integrated Reporting Framework. GRI and ISSB are also collaborating to align both objectives and accelerate the adoption of sustainability reporting.
How does this relate to net zero?
We’ve mentioned the GHG Protocol and how the GHG calculation framework inputs into regulatory reporting such as SFDR and TCFD. Net zero is mainly captured within the “Environmental” category of ESG and sustainability disclosures (the others being Social and Governance), so “carbon accounting” primarily involves accounting for carbon emissions, which is the first step needed to develop a plan to decarbonise to net zero emissions. Carbon accounting is different to “financial accounting” in the traditional sense, although accounting standards boards and authorities (e.g. ICEAW), and the recommended frameworks mentioned above are working to make carbon accounting, and associated climate risk, an integral part of overall financial accounting disclosures and processes.
Getting to net zero
The Science Based Target Initiative, SBTi, a science-based net-zero pathways initiative, uses the carbon footprinting calculated through the GHG Protocol framework and provides the scientific pathway and framework for planning an organisation’s pathway to net zero through sector-based scenarios, helping guide planning and reduction strategies for all types of organisations. These science-based targets are based on scenarios derived from a variety of academic and related sources and provide YoY reduction targets in line with “Well Below 2℃” (WB2C) and 1.5℃ scenarios. A collaboration between Initiatives such as CDP (the global carbon disclosure and reporting mechanism for organisations, cities and countries which holds a variety of disclosure data from these actors), WRI and UN Global Compact, SBTi provides the authoritative guidelines and disclosure mechanisms for companies for emission calculations, Green House Gas reporting, and forward-looking target setting.
Other net zero initiatives and guidance
SBTi provides validation for organisation’s net zero commitments and targets for certain sectors. While there is guidance for financial institutions, the UN-approved Race to Zero is a coalition of different net zero initiatives, many of which focus on different sectors and industries not covered by the SBTi. Some of these financial services net-zero initiatives involved include the Net Zero Asset Managers Initiative (NZAM), Net Zero Asset Owners Alliance (NZAOA), and Net Zero Banking Alliance (NZBA), some of which have united under the banner of the Glasgow Financial Alliance for Net Zero, GFANZ. Others in GFANZ span insurance, financial service providers as well as investment consultants. These initiatives are forums for financial services actors to make commitments, receive guidance on action and share knowledge on how to decarbonise their activities in line with net zero targets and channel their allocations (or business activities) towards sustainable and net zero investments. Almost all initiatives do however reference SBTi (and therefore GHG Protocol) as an authoritative way to account for GHG emissions, as well as the above-mentioned TCFD and sustainability accounting standards for climate risk and accounting disclosures.
The data ocean
There seem to be many frameworks and disclosure standards, so what’s the data issue?
Within the financial marketplace, data is used not just for regulatory disclosures, but also for investment analysis, which requires a variety of data including mandatory and voluntary disclosures, financial performance and ratings as well as external data (e.g. from company-specific and national energy consumption, product materials and embodied carbon information, the government published data such as from the Office of National Statistics ONS in the UK, and even weather and imaging data from earth observation from sources such as the Met Office, European Space Agency, NASA, amongst other). Vast data coverage is required for financial institutions to assess where emissions come from and where to action, as well as for assurance and validation, to realistically and demonstrably channel capital towards achieving net zero.
There are specialised third-party data services (such as Bloomberg’s BNEF, S&P’s TruCost or Morningstar’s Sustainalytics) to benchmark and verify ESG or sustainability claims, but there is often a need for organisations to access the ‘raw data’ that some third parties and companies use for their calculations or to make disclosures due to insufficient data transparency, availability and/or quality. These data providers also amass a wide variety of other data, such as company and country performance and ESG indices provided by the likes of MSCI, and Bloomberg Indices, as well as ratings from rating agencies such as Moodys and S&P amongst others to verify financial stability and benchmarking for to financial institutions such as banks, credit providers and insurance companies. Public listed organisations’ performances and rankings are also provided by some of these indices providers above, as well as stock exchanges such as NASDAQ and London Stock Exchange (part of LSEG, which is also now the parent company of index provider FTSE Russel as well as specialist ESG analytics provider Refinitiv), all which are significant disclosure and third-party data consumers. There are multiple and differing methodologies and frameworks even across organisations, with information silos and financial barriers to appropriate data.
If we look deeper, other types of data providers offer specialist risk/exposure analytics and loss or catastrophe modelling, used by banks and other financial institutions such as re/ insurers to calculate financial risks which look at hazards (flood, fire, storms, earthquakes, etc, all of which are increasing in frequency due to climate change) for exposure and vulnerability assessments. These include service providers such as Ambiental, RMS (now part of Moody’s) and AIR Worldwide (now part of Verisk) as well as the open source OASIS Loss Modelling Framework. (If you want to learn more about the insurance ecosystem, look here).
For the whole financial services industry, The Network for Greening the Financial Services initiative, NGFS has provided future scenarios for different use cases for financial services, including macroeconomic modelling, exposure, stress testing, etc. The Bank of England via the Prudential Financial Authority of England (PRA) is responsible for publishing annual financial scenarios for banks, building societies and insurers for future planning and stress testing, including the Climate Biennial Exploratory Scenarios (CBES) exercise for climate change risk, which was developed together with the Financial Conduct Authority via the Climate Financial Risk Forum (CFRF) that convened senior authorities within large financial organisations including asset managers and banks. They have been working with the NGFS to integrate climate change considerations into these scenarios.
Where are all the underlying data coming from?
These reporting frameworks and standards have been instrumental in instigating action toward net zero, however, “net zero” is still a fairly new and bewildering concept to the many players that need to make net zero happen. How do we appropriately satisfy the guidelines and disclosure requirements? What data for this information is sufficient, of high enough quality (i.e. reliable) and in sharable or interoperable formats to be able to achieve this mammoth task of industrial and global decarbonisation? Are these specialist data providers sufficiently addressing the growing need for net zero data?
As mentioned above, the GHG protocol was established to address the need to calculate and clearly understand how greenhouse gases are produced and from where through business and regional-level activity. But this framework came from a global collaboration of nations, scientists and academia as well as economic actors over years of action to bring to light the existence and severity of how our fossil fuel-based economy has led to climate change and its devastating impacts. There is still a pressing need for underlying data to be made available and shared which can help all actors to understand, manage, monitor and most importantly collaborate and act on their net zero goals.
Carbon or GHG accounting – estimating GHG emissions
The GHG protocol provides guidance on how to calculate emissions from specifically categorised ” “scopes ” (activities)through the use of conversion or “emission factors”. Government agencies and industry bodies (such as the UK’s Department for Environment, Food and Rural Affairs, DEFRA and the Internation Energy Agency, IEA), as well as the global IPCC, publish recognised, authoritative emissions factors to calculate emissions from these activities (such as the ‘average’ carbon emissions from electricity drawn through the UK energy grid, or the emissions produced by the processing of materials such as steel and cement). Other databases such as Ecoinvent and Sphera’s GaBi LCA databases also exist for more specific conversion factors. All of these databases use a variety of sectoral and scientific data to publish these factors, and some are accessed through a paywall whereas some are publicly available (e.g. DEFRA and IPCC).
DEFRA also publishes the UK’s carbon footprint through consumption data and derives emissions factors from a variety of sources such as industry or sectoral data, Energy Network Operators and energy consumption, scientific institutions and other international agencies or academies. DEFRA also provides information on air quality, food, farming and biosecurity and other data, such as that collected and published by the Environment Agency and the US Environment Protection Agency, US EPA. Equivalent bodies in other jurisdictions also publish this data but use a variety of data sources and information to do so, with the frequency of such updates varying widely, and always backwards-looking (for example, DEFRA publishes emission factors once every year). Additionally, these factors (and other such data used for emissions estimations) to be used with actual consumption or industry-averaged data are sometimes not relevant or even available for the multitude of activities that exist and therefore need more information, of higher quality and better frequency to be made available.
Data frameworks, standards and net-zero data
The task of bringing all of these data points and information together cannot be underestimated. One of the biggest challenges is where this data is stored, how to access it (paywalls and security), whether they are sharable and comparable, how these data are presented, the differing formats, taxonomies and frameworks as well as differing data standards involved.
The solution to this big challenge is to make existing data sources searchable, accessible and sharable to all actors in order to achieve net zero. Established and widely adopted data standards, such as the leading standard for business reporting, XBRL, could be leveraged to create a common language for net zero data. Organisations such as Linux foundations’ OS-climate are using the principles and best practices of open source and interoperability to share climate models and tools for a variety of stakeholders (governments, regulators, academics, corporations and others) in order to achieve net zero. The EDM Council is a global membership association that is elevating data management within organisations in order to make data integrity and interoperability possible across industries, countries and beyond. Its Financial Industry Business Ontology (FIBO) can be adapted to relate net zero within business and finance terms and corresponding relations, which drives forward machine-readability, interoperability and thus increase efficiency, sharability and federated data systems. The data and systems exist, but there needs to be a much greater focus on user needs and use-cases to unlock and bridge the data flows necessary for cross-industry and cross-border net zero action.
Who is addressing these challenges and driving net-zero forward?
Icebreaker One is convening stakeholders to understand which data are required and how data can flow into these requirements using data sharing standards and principles established by existing mechanisms (such as the Open banking standard), to understand the data gaps and holes (e.g. the Future of Sustainable Data Alliance, FoSDA that explores what current financial data flows are needed, and the green taxonomies that exist or are lacking) that financial institutions can use for investment analysis and investment decision making for a net zero future. Icebreaker One launched Open Energy through working with the UK’s energy industry to solve the need for better data availability, accessibility and data sharing as recommended by the Energy Data Taskforce. Open energy is based on the principles of data sharing highlighted via the success of Open Banking, through the establishment of a Trust Framework which has grown to become an example of how secure and scalable data sharing is possible.
Many organisations are work to fund this complex ecosystem (e.g. through governments and research funding such as the UK Research Insitute, UKRI and EU’s Climate-KIC, or corporation-established foundations such as Bloomberg Philpanthropies, Climate Works, and Climate Arc) and helping to convene actors, produce research and insights and incubate or test solutions around critical topics.
The vast ecosystem described in this post is but a snippet of the nascent and continually evolving net zero and climate action landscape. It is still unclear whether the multiple standards, frameworks and initiatives can demonstrate real net zero action without the provision of the data necessary (or access to it) to quantify and verify claims. A clear way to address this is through the availability of net zero data — searching a trusted data ecosystem where any and all actors can search for, identify and access trustworthy data needed to operationalise, achieve and verify their net zero goals. By demonstrating such a data-sharing ecosystem can not only work but can drive innovation and change forward (c.f. Open Banking and Open Energy), Icebreaker One’s ambitions with net zero data may well be the change we need to genuinely achieve net zero in the brief time we have left to act.
- Carbon call
- Future of Sustainable Data Alliance (FoSDA)
- Climate Arc (workshop outputs)
- Bankers for Net Zero (UK All-party Parliamentary Group)
- Net-Zero Data Public Utility
- Climate Action Data 2.0
- IB1 Constellation