A deep dive with Nick Gaskell. Eva Cairns sits down and chats all things carbon at abrdn and the main challenges that are faced when it comes to integrating carbon into the investment process 


Eva Cairns: Hi, everyone. I'm Eva Cairns, Head of Sustainability Insights and Climate Strategy at abrdn, and I'm pleased to be your host for today.

You’re listening to the abrdn Sustainable Investing podcast, discussing all things relating to sustainable and responsible investing. And I'm delighted to introduce our guest for today, Nick Gaskell, abrdn's expert on all things related to carbon.

Nick joined abrdn in September 2021, after an MSc in Climate, Finance and Investments from the University of Edinburgh. Prior to this, he worked at a carbon data and advisory firm and another asset manager. Nick grew up and Southeast Asia and Belgium before moving to the UK. He has played rugby for the Belgian national team and still enjoys staying active and is in his own words, ‘a wannabe golfer and surfer’. Nick it’s such a pleasure to have you with us. Welcome.

Nick: Hi, Eva. Thanks for having me. It's a pleasure to be here.

Eva: So, Nick, can you tell us a bit more about your own journey? And what inspired you to focus your career on climate change?

Nick: Yeah, sure. So, to some extent, it was a bit of a coincidence and a convenience, that the two of my interests collided, one being investing and one being climate. From a young age, I was made quite aware of the challenges associated to climate change, mostly due to my parents. But my interest towards the end of school and during my Bachelor's, was really around investing, and investment management. I did a placement year at an asset manager, while doing my Bachelor's. I decided after that degree to actually be a beach lifeguard after a friend convinced me how fun it would be. And I thought, taking a summer to really think about what I wanted to pursue as a career was a good idea. And from there, it was a bit of luck in terms of timing to kind of enter the climate finance world after that.

So, I started working for a climate advisory firm, and before eventually taking on a postgraduate degree in Climate Finance and Investments at the University of Edinburgh. And that decision as well was really, I took time while during the first lockdown, during COVID, to just think about what the next steps would be useful and worth pursuing. And I guess that was also a bit of a convenient coincidence as well, to be able to just take that time and make that decision. So yeah, that's how I how I got to the job now at abrdn.

Eva: And that's fantastic. And I'm so glad this convenient coincidence, brought us to the Sustainability Insights team at abrdn. And obviously, you focus on all things climate change, and do different aspects of research, but also focus on carbon and carbon data. So that's one of the things I wanted to explore with you. What can that focus on carbon emissions as an asset manager, really tell us? And why is it important to understand which carbon metric you choose and focus on?

Nick: Yes, so measuring carbon is really the foundation of integrating climate change into investment processes. So measuring carbon is crucial. It's commonly cited, you know, the, the phrase that comes to mind is that ‘you can't manage what you don't measure’. I'm actually not an absolutist in using that phrase, but it definitely holds a lot of weigh in that having carbon data allows us to assess and benchmark progress, identify carbon exposure, and the impact of different companies relative to their peers from a climate perspective.

For investors, it's all about measuring carbon in their portfolios. So we've done a lot of work on the various metrics, for example, financed emissions, which measures the tonnes of CO2 that the investor effectively owns, or finances through their investments. And then there are intensity metrics where emissions are divided by for example, revenues in the case of weighted average carbon intensity, otherwise known as ‘WACI’ for short. This is to account for the growth in companies. So to some degree, it's kind of capturing carbon efficiency if you like. Then the most recent development is dividing that emissions number by enterprise value, including cash. And that's for metrics such as economic emissions intensity. What we found is across all of these various metrics, different components of the metrics can drive the final result. And what we've basically concluded is that no single metric will answer all of your carbon questions as an investor. So, the first step is being really precise with what your carbon question actually is. And then being very precise about understanding the underlying drivers of each of those metrics and then contextualizing the final result, because there are those different components that can move that metric. So that's really, really crucial, in our view.

Eva: And that's really interesting and obviously really important to understand, as you say - when we say ‘carbon’, it's not as simple as just carbon - there's all these different metrics. Can you give us an example? So you say it depends on what carbon questions you want to answer. Let's say you want to, you have set a carbon target and want to track your decarbonisation progress based on carbon intensity. And you've mentioned you can have the revenue based WACI or more EVIC based metrics. So why does it make a difference? What's important to understand there?

Nick: Yeah, so I think the first step there is, you know, the goal, I suppose, if you take into account, you know, the climate goals that have been set, since the Paris Agreement, it's all about getting to net zero and reducing absolute emissions. But as an investor, that's difficult to assess progress, because let's say you increase your assets under management, you're going to have a natural increase in the emissions that you're financing. Or if in the short term, the companies that you're invested in grow, and for example, they grow their market share, naturally, their emissions will increase. So, intensity is often used as a way of measuring carbon investors.

So, if we take WACI for example, all things being equal, if revenues increase over time, your weighted average carbon intensity is going to fall, because the number of which you’re dividing emissions has increased. Then for example, if we take economic emissions intensity, which uses enterprise value, including cash, there are several drivers of EVIC. So EVIC is effectively market capitalizations on the equity side, plus total debt, so if we see a fall in equity markets, for example, what's going to happen is debt investors are going to own a larger slice of EVIC. And therefore, they're going to own a larger slice of emissions depending on what changes in their portfolio with regards to weightings, and obviously, how emissions change. So breaking down all these components is really crucial for investors to really get under the bonnet and understand what their portfolio metrics are telling them.

Eva: And what would you say are the main challenges when it comes to integrating carbon into the investment process?

Nick: Yeah, it's a good question. So from a metric point of view, so choosing metrics, the challenge is that carbon is only one component of each of the equations, you know, so there's the revenue component, there's the portfolio weighting component, PE ratio, so market valuations can drive equity markets. So those can all change.

Our view is, the solution there is to have an active carbon risk management approach. So really, that means for us disaggregating the components of the metrics, so as to measure and the extent to which they're driving the final results.

From specifically a carbon data point of view, the fact that emissions data is backward looking, and there's often quite a large timeline when you consider all of the timelines that occur. For example, if a company has decided to reduce their emissions, what they're going to do is finance their green capex, if you like, they're going to spend that green capex on a project, that project will then return a realised reduction in emissions once it's up and running. And then they'll typically probably take about a year to actually calculate and report in their public report - reporting those emissions reductions. Then the market has to absorb that data. So, you can see that there's quite a big time lag between climate action being taken if you like, and that data actually being captured by the market.

Eva: And you talk about obviously, the issue that the lag in the backward looking data. And as an investor, we want to take that forward looking view and understand the trajectory of carbon. So, what would you say is the best way of bringing that forward looking view of carbon into the investment decision making?

Nick: Yes, so our climate scenario analysis takes into account multiple scenarios off the shelf. So, these are NGFS scenarios mostly. And what we basically do is add a layer of bespoke scenarios to that which essentially create a little bit more of a granular view as to the regional and sectoral dispersions that are actually occurring in the real world. So, for example, the utility sector in Europe has decarbonizing much faster than the equivalent sector in other parts of the world and regions, and that's often not captured in off the shelf scenarios, which are often used. So, we use the range of scenarios. And from there, we're able to build a probability weighted view - a mean scenario - that we believe is most likely to occur. And right now, our mean scenario is telling us that we're about on a 2.2 degree warming trajectory. And what's quite nice about the scenario approach that we've developed is that the granular level of a company we can see what is driving the impairment that that company may face. So, for example, on the downside demand destruction impacts, on the upside demand creation impacts. As well as competitive changes, such as either is that company able to pass through the costs associated to maybe the carbon price, for example. So, bringing in all of these impacts is quite important in developing a clear forward-looking view of how company sectors and so on will be impacted by climate change from an investor's viewpoint.

Eva: And then we can also from that analysis, derive a forward-looking emissions trajectory, right, that is not just based on taken company targets at face value, but actually based on that scenario analysis and the market and policy and technology drivers.

Nick: Yeah, exactly. You know, being able to see what is actually driving it from a macro lens is very, very crucial, considering how large this problem is, and how long term the structural challenges are. And then at a company level, what we can then do is also assess credibility by looking at green capex plans, and understanding what corporates need to do in terms of how they're going to raise that finance, what technologies they're going to be invested in, how mature are those technologies and how that business model of that corporate will change and which markets they will go on to compete in as they start to actually go towards a low carbon form of operations.

Eva: And one of the issues that we know is always talked about as data gaps. You know, so data is not perfect. How do we deal with that? And where do you see the biggest issues when it comes to carbon data gaps?

Nick: Yeah, it often feels that within the sustainability spaces, data gaps everywhere you look, and I think it's because you know, compared to financial data, for example, it's relatively new. But you know, there's data gaps exist either because of maybe low levels of reporting, or how data is reported, a lack of consistency there. Data quality, or timelines that we've already discussed, or the data relating to something that is arguably subjective or qualitative, and emissions data, there's a bit of a hierarchy of data completeness. So, we find that large cap companies in developed markets tend to have better data than smaller cap companies and those in emerging markets. And crucially, across the scopes of emissions - scope one, two, and scope three. Most companies will have sizable and material scope, three emissions exposure, and that's basically emissions that are across their supply chain, both upstream and downstream.

But within the emissions data universe, there is about 90% of scope three that is still being estimated. On the forward-looking side of things, I think, fundamentally the cause of data gaps is that climate transition is actually a very uncertain thing. You know, there's lots of different pathways that could achieve the 1.5 degree target, or well below 2 degrees as well. And ultimately, how we deal with this challenge is by taking in all this data, understanding its limitations, developing our own views on scenario pathways, and crucially, being active in the investment process. And taking a bottom-up view as to how companies are approaching climate change and also being active owners in how we engage with companies. And also as well in how we engage with data providers to actually seek to improve this the state of challenge that we all face, quite frankly.

Eva: And so given the limitations we've talked about and the challenges, one of the things we're seeing in the industry is an increasing commitment to calm target setting and net zero. abrdn ourselves, we're members of the net zero asset managers initiative, and there are many different approaches there to target setting. Can you talk a bit more about that? What are the different approaches we're seeing? And what are the implications of that?

Nick: Broadly, there are about three. So, there's setting a portfolio level emissions target, which is the approach that we've gone down. And setting a threshold for the percentage of companies that have corporate emissions targets or set their own emissions targets. And finally, the use of an implied temperature metric, which essentially attempts to model the implied temperature warming of a portfolio based on the investments that it makes.

And we believe that, you know, the most robust and transparent approach is that emissions target approach. Is it perfect? Certainly not considering, you know, all the points that we've just discussed. However, from a methodological perspective, it's certainly the most transparent. For example, the implied temperature metric has really some serious oversimplifications, in our view. Anyone that's read the latest IPCC AR Six report will see that temperature warming levels have a wide ranging probability distribution of what the carbon budget for that given level of warming actually is. And as an investor, our biggest concern around the corporate emissions targets approach is that, despite us wanting to see more corporate set those targets, we really need to understand the credibility of those targets. And having a robust framework around assessing whether or not a corporate can actually achieve those targets, and what impact that will have on the underlying investment, rather than blindly you know, just applying a percentage of investments that we deem must have a have a corporate target.

Eva: Yeah, so that's really interesting, because investors was going use different approaches, which makes it then difficult to compare, but I would fully support what you said around in play temperature metrics. And there's this desire to have a simple transparent number that says this portfolio is 3 or 2 degree aligned. But because of the oversimplifications, you've talked about this can be quite misleading. It just doesn't capture the full picture, it doesn't capture climate solutions very well. And so, in practice, what you're saying with the portfolio level emissions target approach, you would look at a carbon emissions trajectory, and then compare the trajectory for the portfolio to that, is that right?

Nick: Yep. Yeah, that's correct. And, you know, since we're looking at these carbon metrics, at a quite granular level, we can also break down the components of what's driving them. And we can relate as well, you know, the result to the scenario pathways that we need to achieve the climate goals that have been set by the Paris Agreement as well. Whereas, you know, these other approaches, there's, I guess, there's greater distance between really actually being able to see what the emissions pathways are, right. So how credible is a corporate target, for example, as one element, but also, how does that corporate target relate to all the emissions reductions that are happening within that sector anyway? And how that company's business model is changing and adapting? And then yeah, on the point of the implied temperature metric, it's, it's very interesting, you know, there's some very, very odd results that you can often find with those. And I think it often is due to the fact that this is a systems problem, right? So, there's lots of different elements of supply chains that need to basically change , if we’re going to get to net zero but be reconfigured, for example, and the reality is from maybe a scope one and two perspective, some climate solution companies are actually somewhat carbon intensive in the present day. And understanding that nuance through an implied temperature metric, we call can be quite difficult and quite confusing to some people because, it is, it does appear quite simplistic when you just say this portfolio is aligned to a two degree scenario, for example.

Eva: Okay, so in a nutshell, we've heard from you that the carbon metric choice is really important, we have to understand the forward-looking view on that and also the credibility I think of target setting has come out as it as a clear theme. So, I'd like to move on to just talk a bit more about yourself and how the aspect of climate change is reflected in your personal life for example, can you tell us more about that?

Nick: Yes, sure. So, I've always loved being in and around nature. So, I'm definitely a wannabe surfer. So, I try to surf as much as I can, but admittedly a lot less than I should, but I love the ocean, love swimming. And, you know, after becoming more and more aware of the climate challenge, and the impact that we're having on the planet, I shifted from really loving being in nature and having a more profound appreciation for what we actually have. And the benefit that we all, we all get from, quite frankly, using the planet's resources. And, you know, from that, I think we have a real collective responsibility to respect how fortunate we are, to be able to have this planet, quite frankly.

On a personal level, I try to limit my consumption of discretionary things in particular, you know, that I don't really need necessarily, and I try to reuse as much as possible and recycle etc. One thing from the master's degree that I did in Edinburgh was, we produced a personal carbon footprint. And one thing that I found, which was really interesting is that on an individual level, flying was by far away the biggest contributor to a personal footprint. Even if you fly just once in a year, you know it's going to really increase your annual footprint.

But in the real economy, aviation only accounts for about 2.1% of emissions. And I thought that gap is quite interesting. And I think it really emphasises just how systemic the climate challenge is. So, you know, when I'm when I speak to friends and family, you know, as individuals, it's obviously very important that we do what we can to try to limit our impact. But my point here is that, you know, as individuals, we almost have to take a bigger picture approach, which basically means advocating for climate positive actions and businesses and government, you know, your own employer, for example, try to make sure that they're shifting the way that they think about the resources they use, and your local council as well, how they approach the situation. And I think the more people that end up doing that the more, we would actually be able to move the needle. And I think we're slowly seeing that around the world with recent election results, right? It's very interesting to see.

Eva: Okay, that's, that's fascinating. And as we wrap up the podcast, I've got two final questions for you. One is looking three years into the future. Where would you like to see the investment industry when it comes to supporting the net zero journey?

Nick: Yeah, so I'd like to see a lot more discussion around what a net zero world actually looks like. So, I personally try to conceptualise transition risks and opportunities by mapping out how sectors need to decarbonize and what a net zero version of that sector actually looks like, and then working back to the present day, to understand how things need to change. So, I think moving away, or perhaps a maturation of the discussion around carbon metrics and corporate emissions targets and implied temperature metrics to actually the fundamental bare bones of - what does the agricultural, steel, cement, mining, chemical sector actually look like? What needs to change within their supply chain to actually get to a net zero world? I think once we get to a point where investors, corporates, governments, civil society is actually having that discussion with more clarity, then I think we're going to be able to go and shift towards the question of, okay, how do we actually get there? And that's not to say, you know, in pockets, we're having those discussions, but I believe more broadly speaking, I think that sort of way of thinking needs to be emphasised a bit more.

Eva: Okay. And, and as a very final question, it would be great to leave listeners with something that inspires you and keeps you motivated on that journey. Is there maybe a person that inspires you or any books or podcasts that you would recommend?

Nick: I find doses of inspiration, I think, working within climate finance, especially the sustainability team at abrdn, there's clearly a strong motivation to do the right thing. And that's embedded in the culture and also inspired by those you know, that take personal risks to start new, innovative businesses or initiatives that attempt to solve the various challenges that we face. You know, climate is such a structural challenge and long-term challenge that we need the sum of all of these efforts in order to solve the problem.

For podcasts, I'd recommend ‘Decarb Connect’ is quite good. They often get corporates on and talking through their challenges and quite transparently, which I think is quite interesting. And the strategies that they're taking to, to actually solve some of their problems.

In terms of books. I quite like Vaclav Smil’s perspective, I think Bill Gates once said that he there is no other author, he looks forward to reading most. So that Vaclav is unapologetically rational. So, if you're looking for a hopeful message, he might not be the best author. But at the same time, he's actually not excessively alarmist either. So, if you want a dose of pragmatism and kind of, just a rational view of how we got here, and you know, where we need to go, what needs to change and to gain insight as to how big this challenge is - the scale and magnitude of it, that's quite a good place to go. And I think more people that, you know, take on these challenges head on, better our future will be

Eva: Fantastic. And on that note, Nick, thank you so much. We've come to the end of our podcast. And it's been such a pleasure to have you with us. So, thanks a lot for your time and your inspirational contributions.

Nick: Sure. Thanks for having me. Eva.

Eva: You've been listening to the abrdn Sustainable Investing podcast, a podcast relating to all things responsible and sustainable investing. And today, a special episode with Nick Gaskell on all things related to carbon. Thank you all for tuning in. You can find all our episodes on various podcast channels such as Spotify and Apple, as well as on the abrdn website. Until our next podcast. Goodbye for now.