Bloomberg's greenhouse gas emissions estimates

The precautionary principle says, “If in doubt, err on the side of the planet and the environment.” Bloomberg Paris-Aligned Indices apply the precautionary principle in all stages of index construction.

Bloomberg's greenhouse gas emissions estimates

For investors, monitoring the GHG emissions of companies in their portfolios is becoming an important part of the investment process. However, the availability of reported GHG emissions data varies tremendously across countries and business sectors, and many companies do not report their emissions at all.

In order to bridge this gap, Bloomberg developed a machine learning-based model to estimate companies^' GHG emissions. The Bloomberg GHG Model estimates direct (scope 1) and indirect (scope 2 and scope 3) emissions for companies with a sufficient amount of data necessary to produce defensible outcomes.

At present, companies disclose GHG performance through voluntary channels — for example, via sustainability reports or Carbon Disclosure Project (CDP). The GHG protocol is the main, but not the only, reporting framework. The following chart shows scope 1 & 2 coverage by various regional indices. Scope 3 is evolving, and currently only required for the oil and gas sector and mining companies. As of March 2022, Bloomberg’s scope 3 model provides coverage completion for 100% of the Bloomberg World Materials Large & Mid Cap Equity Index, and 93.5% of the Bloomberg World Oil & Gas Index.

The need for precautionary estimates in PABs
The precautionary principle says, “If in doubt, err on the side of the planet and the environment.” Andreas and Joeri (2021) suggest applying the precautionary principle to emissions estimates with the aim of minimizing risks of reaching unacceptable levels of climate change.

 

The incorporation of worse-than-mean estimates shows that Bloomberg Paris-Aligned Indices take a conservative approach in our GHG estimates per the precautionary principle, in line with the precautionary approach to climate and environmental protection. The index is choosing to use a 75^th percentile estimate instead of the expected value – something point estimates models cannot offer. Corporates usually use climate disclosure to signal efforts in transition to the low-carbon economy. The use of precautionary carbon estimates further encourages non-reporting corporations to disclose GHG emissions.

To learn more about Bloomberg's GHG emissions estimates, read our blog post here.