Pathzero: The world’s largest data sharing network for private market carbon emissions.
Emissions tracking tool a winner for super funds and Pathzero
Aware Super and Hesta use Pathzero software. So do 600 fund managers. It’s already the world’s largest data sharing network for private market carbon emissions.
This article is part of the Most Innovative Companies List special report, published on 9 October, 2024.
When Carl Prins and Charbel Ayoub met in the Antler accelerator program in 2020, they quickly found enough common ground to get working on the building blocks of what would become the world’s largest data sharing network for private market carbon emissions.
Fast-forward four years, and the start-up they co-founded to realise their vision – Pathzero – has been crowned overall winner of The Australian Financial Review 2024 BOSS Most Innovative Companies awards.
As they brainstormed in a co-working space near Wynyard Station in Sydney’s CBD, the pair sensed they had a real opportunity in front of them.
Prins, who had worked as a CFO in investment banks and hedge funds, explained to Ayoub, whose background was in software engineering, how the shift to using cleaner sources of energy this decade would require new IT systems to be built.
They would need to feed the amount of carbon being pumped into the atmosphere to the superannuation giants sitting at the top of the capital pyramid, he figured, to ensure they could keep track of the environmental footprint of the companies they were invested in.
“As we moved to this low-carbon future, I thought: greenhouse gas accounting will become as ubiquitous as financial accounting,” Prins says. “We saw the first source of demand – where there would be enough of a push from people willing to pay for the service – would be the capital supply chain.”
greenhouse gas accounting will become as ubiquitous as financial accounting
As the pair got to work, their initial intuition was propelled by strong regulatory tailwinds. Governments have created mandatory carbon reporting regimes. Meanwhile, regulators are taking “greenwashing” legal actions against investment funds making claims about sustainability of investments without being able to prove it.
The Pathzero system allows asset owners to discover energy transition risks lurking in their investment portfolio. The system is focused on private, unlisted markets – including private credit, commercial real estate, private equity and infrastructure; areas that comprise between 20 per cent and 35 per cent of typical superannuation fund asset allocation.
Its customers include Aware Super, HESTA, the Clean Energy Finance Corporation and StepStone Group, one of the largest allocators to fund-of-funds, based in the United States. It is talking to the other big names in the local superannuation industry, and a handful of sovereign wealth funds, in an attempt to lure more large investors onto its system.
Information = power
While there are many data aggregators selling insights to super funds, the judges saw that the genius in Pathzero’s business model was creating something different: an information sharing platform that has created a powerful communications network.
The secret sauce is the creation of an ecosystem where super fund managers push the companies they invest in to provide better information on emissions and plans to abate them, and share this with other super funds.
Through Pathzero’s “library”, the data is shared securely and privately. Fund managers don’t pay to use the platform; they are “sponsored” into the system, with fees paid by the super funds. They’re incentivised to do so because the system reduces reporting costs, provides a consolidated view of emissions and hence reduces regulatory and investment risk.
We provide the ability to improve the data, by asking questions. It is not just static data – it is a communications network.
— Carl Prins, co-founder, Pathzero
There is already a network of 600 fund managers around the world onboarded to the system, including more than 200 active users each month. Its coverage of private markets includes $4.5 trillion of global assets, which Pathzero estimates to be more than one-third of the entire universe of investible private market assets.
“We are the largest private emissions’ data network globally,” Prins says. “We believe we have the best product, globally, for private market emissions data, and not just a snapshot, but we provide the ability to improve the data, by asking questions. It is not just static data – it is a communications network.”
Pathzero’s software shows every company in an investment fund’s carbon emission at the Scope 1, 2 and 3 levels. Based on reporting standards set down by the Partnership for Carbon Accounting Financials (PCAF), it can provide estimates if only certain information is known, such as location, tonnes of a particular commodity produced, or company revenue. PCAF scores can be improved as actual, audited emissions are added.
The platform lets an asset owner drill down into fund-of-funds structures. It allows them to request better reporting, including plans to reduce high emissions. The network effect means if one super fund requests improvements to the data of underlying investments, other super funds using the system will be able to access the enhanced information if they own the same assets.
The system can also be used for due diligence; investment teams can use the data to model the impact a particular acquisition will have on overall emission intensity of a portfolio.
As Antler tipped more money to support the development, it also attracted Carthona Capital as an investor, after it started out as a customer. “Pathzero has taken a unique approach and achieved scale by focusing on asset owners, and enabling them, really for the first time, to estimate financed emissions across their whole private portfolio, with the touch of a button,” says Carthona partner Dean Dorrell.
“No more spreadsheets, ad hoc requests or head in the sand. The added beauty of the system is it enables a trusted communication platform between asset owners and managers, that is applicable to all facets of LP–GP [limited partner-general partner] interaction. This is hugely important, especially for fiduciary reasons.”
Pathzero now has its eyes on global growth, initially in Europe, which has more advanced climate reporting regulation. “This is also a “winner takes most” market – there will be a dominant global player,” says Dorrell. “We believe that will be Pathzero.”
The combination of aggressive regulatory enforcement actions and the mandatory reporting regime has created a burning platform for superannuation funds to ensure they know the emissions-intensity of the private companies they invest in, alongside public equities where better data is available.
The Albanese government has legislated new rules requiring standardised emissions data to be disclosed. For large investment funds, the data for their underlying investments will need to be reported from June 2027.
Funds will have to report not only emissions, but climate-related targets, and companies’ progress toward goals. If entities have established transition plans for shifting towards a low-carbon economy, these will need to be described, in terms of objectives, timelines and progress.
Along with the Scope 1, 2, and 3 emissions, investors will have to disclose climate-related metrics including emissions intensity, water use and energy consumption.
Reports will have to be compliant with a host of regulations, including the Australian Sustainability Reporting Standards, the Task Force on Climate-related Financial Disclosures, and the International Sustainability Standards Board.
The real cost
But Prins says the movement goes beyond tick-a-box regulatory compliance. Unquantified transition risk could trigger losses for investors, hitting investment performance. “This is less to do with good intentions, and more to do with genuine financial risk,” he says.
The real cost of exposure to carbon was on display last year, when Rio Tinto was forced to make a big write-down on its Australian alumina refineries, due to the impact of the federal government safeguard mechanism, the policy for cutting emissions in large industrial facilities.
Rio said the cost of building decarbonisation technology, and buying carbon offsets, had cut the book value of the two refineries by a combined $US828 million after tax.
Then there’s the regulatory risk from the corporate watchdog’s attack on greenwashing. Vanguard and Mercer have already paid big fines.
Mercer was ordered to pay an $11.3 million penalty last December, after the Australian Securities and Investments Commission argued the retail superannuation giant misled members about the sustainability of its investments. This was the first fine handed down in a greenwashing court action in the financial services industry in Australia.
An even larger fine followed this year. In September, the Federal Court ordered Vanguard Investments Australia to pay a $12.9 million penalty for making misleading claims about environmental, social and governance (ESG) exclusionary screens.
“You only have to look at the greenwashing fines handed out very recently to see the scale of the problem,” Dorrell says. “ASIC are going to continue to be very tough on this – and quite rightly so. The climate change problem is big enough without finance providers misleading consumers.”
After the Vanguard penalty was announced, ASIC deputy chair Sarah Court described greenwashing as a “serious threat” to the integrity of the Australian financial system, and said the area remains an enforcement priority for ASIC.
“It is essential that companies do not misrepresent that their products or investment strategies are environmentally friendly, sustainable, or ethical,” she said.
Prins says to meet higher expectations, funds need to realise the movement is about more than compliance, and may require more than plucking a number from a database that someone is selling.
“What can you really say about an investment’s transition risk, if you have no connection to the company?”