Investors could benefit from Carbon Ratings
A recent paper from the Bank for International Settlements (BIS) demonstrates the importance of choosing the right data for producing company ratings.
The average investor looking for somewhere sustainable to put their money might assume that green bonds would be a good bet – however, BIS research has shown no evidence that firms issuing green bonds are also reducing their carbon footprint.
The BIS paper makes the case for looking directly to a firm’s data to assess sustainability, rather than rating a firm’s green bonds as individual products. Rating firms by using data from their carbon disclosures, which is mandatory in the UK and increasingly common elsewhere, would provide a more accurate picture of sustainability for investors, and could incentivise firms to improve carbon efficiency.
BIS highlight three features that would be crucial for creating a rating system that is useful for investors: simplicity, sufficient granularity, and ratings stability. Feeding into all of these is the quality of available data. While carbon disclosures, a relatively simple outcome-based measure, have become widely available, assurance and consistency could be improved. For properly accurate ratings, ideally machine-readable, XBRL-tagged, audited carbon emissions disclosures would be readily available from around the world.
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