Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Big super turns to ‘the Excel of carbon’ – but beware the ‘house of cards’
Michael Lebbon wants to create carbon data that’s as ubiquitous as Uber. But he believes that too much consolidation in the still nascent industry risks creating a dangerous game of follow the leader.
“I’ve never wanted to work in pure finance; it didn’t sit well with me,” says Michael Lebbon, CEO of carbon data startup Emmi. “It felt like going with the system, and the system was broken. I wanted to do something to improve the system, rather than being a cog in the system.”
He’s spent his career exploiting mispricings in the carbon credit market instead, creating and trading millions of tonnes of carbon credits, and over the course of 15 years has seen “the good, the bad, and the unexpected”. The good has been the global recognition of the opportunities and risks of climate change; the bad has been the fly-by-night operators who have flocked to take advantage of them; and the unexpected is what the government response has been – mostly non-existent.
“The realisation I’ve had and that others have had is that climate change is the perfect political football… (governments) care more about their political ideology than actually fixing the system,” Lebbon says. “Politics and governments will be a tailwind for all of this, but they’re not going to be the driving force – there’s too much political risk. The Kyoto Protocol fell down because of governments’ inability to politically navigate the landscape.”
Which has put the onus on institutional investors to step up where governments have checked out. But there are roadblocks that have prevented them from moving faster on what is now known to be an existential threat to not just markets, but the human race. Among them, the lack of hard carbon data, and the difficulty in using that data to price the risk of a carbon constrained economy into their investment decisions.
It’s a problem that’s had Lebbon “banging his head against the wall for 15 years”, and which he aimed to solve by starting Emmi; a carbon data company backed by a number of high-net-worth investors with tools that have found their way into the research and modelling arsenals of some of Australia’s biggest super funds, including Aware and HESTA, as well as asset consultants like JANA.
“There’s upwards of $43 trillion of managed assets at risk in the race to net zero… And in any race, there’s going to be winners and losers, and the race to net zero is no different,” Lebbon says. “Realistically, it’s the ability to understand and exploit the inefficiencies in this race to net zero that is going to define who will win and who will lose from a returns perspective.”
Lebbon believes that other carbon rating and ESG systems attempt to provide a “definitive answer” on what companies are exposed to – but that those answers are less definitive than they seem. Emmi instead uses public disclosures to create a “universal benchmark” that users can integrate into their own management system as well as modelling assumptions where data is lacking, such as around scope 3 emissions and the uncertainties that still exist about how extreme global temperature rises will be.
“In the same way it’s not about the size of your debt, it’s how you can service your debt, in regards to a credit rating, we look at the ability of companies to manage the transition to a carbon-constrained world,” Lebbon says.
“You need to start understanding how productive people are being with carbon emissions, and if we can do this without qualitative bias, we can do 80 per cent of the heavy lifting for investors to understand. And then it allows investors to overlay their qualitative assumptions, and validate them, and do what investors do. That’s what sold it to people.”
To Lebbon’s mind, the burgeoning carbon analytics industry can go one of two ways. Either it becomes more fragmented, with diverse players and products catering to the many nuances of climate change – or Big Tech does as it always has and snatches them all up. The latter outcome is probably more likely, but less desirable. Lebbon is sceptical of centralisation of data, believing it could create a “house of cards” where investors blindly follow the recommendations of a small handful of powerful research houses with potentially disastrous consequences, á la the ratings agencies prior to the GFC.
But the former needs agreed upon standards that have not yet been decided. A global carbon price would help. It’s not an insurmountable difficulty, as many governments pretend; Lebbon cites the US Environmental Protection Agency’s Acid Rain Program, started in 1995, as one effort where there are learnings to be had.
“The US government put a cap-and-trade system in place for sulphur dioxide, and it worked efficiently, didn’t have that much cost impact, and solved the acid rain problem,” Lebbon says.
“Cap-and-trade and caps on outputs is nothing new in environmental markets, but acid rain was a tangible problem that we all wanted to solve.”
“But when it comes to climate, because it’s a little more intangible, and everything is more intertwined, there’s a lot more political persuasion that goes on and it’s harder to implement. But if we can get a global carbon price implemented, that is the best way and the most efficient way to mitigate climate change globally.”
Emmi is chaired by former Hyperion managing director and current chair Tim Samway, who was introduced to Lebbon in 2020 and who has put his own money into its funding rounds. Other investors include former AMP chair Catherine Brenner and UK-based venture capital firm Illuminate Financial VC.
Its most recent raising was oversubscribed (Emmi only wanted $1.5-$2 million, and got $3.5 million instead) and the extra capital will also be deployed into outreach and communication. That’s in service of Emmi’s big picture goal of – essentially – total domination of the market. Lebbon is hopeful for an expansion into Europe and North America and the potential for Emmi to become globally ubiquitous: “the Excel of carbon data”.
“We don’t hold any punches in saying that we want to be the global piece of infrastructure that everybody uses to understand carbon,” Lebbon says. “We’re not trying to say we’re the smartest people in the room; what we’re trying to create is the ecosystem and frameworks for asset owners and asset managers and asset consultants to understand the risk.”
“We want to be a synonymous name; when you think ridesharing you think Uber, and when you think carbon you think Emmi.”
