Zfolio publishes the Delta Attribution methodology

Delta Attribution: A New Method for Understanding Changes in Portfolio Emissions

Forthcoming in

Abstract

As organizations gain more experience in measuring the financed emissions of their investments and loans, they often find that the year-over-year changes in emissions are not what they were expecting. Financed emission depend on factors beyond just the actions of the portfolio managers or the companies that they finance. An attribution model is used to attribute the changes in emission to the different factors causing the change. It is therefore a powerful tool for understanding, explaining and managing portfolio emissions. Attribution models have two main components: the mathematical method for calculating the attribution and the choice of explaining factors. This paper compares several different methods and alternative choices of factors. The proposed model uses a method and factors that are widely used in other applications in portfolio management and sustainable finance – however their application to this problem is new. Consequently, the attribution results are familiar and intuitive to financial professionals. The new model is then applied to a multi-year global equity portfolio example.

Key Highlights

• The delta attribution model uses the basic Brinston methodology that is widely used in performance attribution, but applies it to the attribution of changes in portfolio emissions.
• The attribution factors are sector weight, holding weight, company emissions intensity and company valuation. These factors are familiar to most portfolio managers.
• Quantifying the impact of these factors allows stakeholders to assign responsibility for changes in emissions to the portfolio manager, the companies they invest in or other extraneous influences.