Second Assignment

Using PCAF Data To Understand Financed Emissions in Emerging Market

The intended audience of this paper is the emerging market debt team as well as general investors.

Executive Summary

• The PCAF provides valuable insights into measuring carbon footprint, but there are limitations in terms of metrics and data.
• Production and consumption emissions per capita are different in most countries.
• Emerging countries have shown an overall positive trend of decreasing carbon emission intensities in the past decade.

Introduction

Emerging markets are vibrant, but also volatile. Investing in emerging market sovereign debt can offer attractive potential returns for investors, as these economies often have higher economic growth rates. However, investing in emerging market sovereign debt could be risky and bring negative impacts on climate.

The Partnership for Carbon Accounting Financials (PCAF) can help investors in sovereign debt assess the climate impact of their investments. By measuring the carbon footprint, investors can identify countries and issuers that are contributing the most to carbon emissions and help mitigate climate change through investments.

Analysis

For most of the countries, there are significant disparities between production emissions per capita and consumption emissions per capita resulting from international trade (see figure below). When a country produces goods and services, it emits greenhouse gases (GHGs) through various processes such as energy generation. If these goods and services are exported and consumed in another country, the emissions associated with their production will not be accounted for in the consuming country’s inventory of GHG emissions. This creates a discrepancy between the production emissions and the consumption emissions of a country. Thus, financial institutions as well as general investors need to track the GHG emissions of countries more holistically rather than depending on one sole metric.

Emerging market countries are scattered around the dotted line, which means that their emission intensity metrics are different from a production perspective and from a consumption perspective. Emerging market sovereign debt may be attractive than developed market sovereign debt due to the potential for higher yields. However, it should be noted that investing in emerging market sovereign debt can also have an impact on sustainability and environmental issues. Below, I select nine emerging countries to explore their GHG emissions.

Some emerging markets have highly overlapping production and consumption emission metrics, while some have more divergent metrics (see figure below). Production and consumption emissions per capita are very close in Brazil, India, and Indonesia. And the metrics are getting closer in recent years in Mexico and Turkey. However, the differences between two metrics are significant in China, Poland, Russia, and South Africa. Each country exhibits its own characteristics on emission metrics. They also have its own ESG factors to consider when assessing investment opportunities. Therefore, it is important to conduct country-specific analyses before investing in sovereign debt.

In the past decade, emerging countries have shown an overall positive trend of decreasing carbon emission intensities (see figures below). This trend is a promising sign for global efforts to mitigate climate change, as emerging countries are among the largest contributors to greenhouse gas emissions. Although China is one of the largest GHG-emission countries, its production and consumption emission intensity metrics have shown a remarkable rate of decline. Investors can take decreasing rates of emissions into consideration, because their investments could be used in emission reduction projects contributing to sustainable objectives.

Conclusion

The PCAF provides valuable insights and practical guidelines for measuring the carbon footprint of investments, which can help investors make more informed investment decisions. However, carbon emissions data might be incomplete or unreliable, and the metrics also have limitations. Furthermore, investors should consider more other factors besides carbon emissions when investing in sovereign debt, such as social and political factors, etc.