February 18, 2016

Strategy Insight: Measuring the carbon footprint of your portfolio

Sally Campbell from JBWere looks at the carbon footprint considerations within fund managers’ assets, highlighting that some are more progressive than others.

Sally Campbell, JBWere

Ever wondered about the carbon footprint of your recommended investments? Increasingly, we’ve found clients want to know more about their portfolio’s environmental impact.

Recently we received a query from a not-for-profit organisation interested in understanding the carbon footprint of their portfolio investments. This query was a catalyst for us to commence a new investigation into this issue, to see how far progressed (if at all) our recommended fund managers and the industry is in this initiative.

Reducing Emissions Across the Portfolio

In 2015, the UN PRI (Principles for Responsible Investment) initiative published “Reducing Emissions Across the Portfolio”, encouraging asset owners (and thereby fund managers) to:

•     understand their carbon risk exposure by measuring, analysing and reviewing their carbon footprint

•     mitigate their carbon risk exposure by setting a goal to reduce emissions.

Montreal Carbon Pledge

In 2014, the Montreal Carbon Pledge committed signatories to measure and disclose a portfolio carbon footprint. Only 50 investors globally have endorsed this pledge, to date.

So how do you measure a carbon footprint and what level of detailed is required?

Process of measuring carbon footprint

Measuring carbon footprint is an expensive and complex process. The UN PRI paper referred to measuring the carbon footprint of any company by measuring the greenhouse gas emissions onsite at every facility managed by the company, across all operations, through the supply chain and including raw materials used in production. Information can be taken directly from the company (which may or may not be verified by an external source), to generate carbon footprint estimates. Information can be reviewed annually, or more dynamically.

Some questions to consider include: it is enough to measure the carbon emission from the raw material stage through to the final sale, or should we explore deeper? The UN PRI categorises two levels of possible analysis:

•     Cradle-to-gate (Scope 1 and 2): understanding a company’s footprint up to the point of sale.

•     Cradle-to-cradle (Scope 3): considering the whole lifecycle of a product, from sourcing of raw materials, through the use phase to eventual disposal.

Case studies

Recently Ford analysed its business and found that 90% of its footprint came from the use of its cars and trucks, rather than the manufacturing of the vehicles. In the case of Ford, if you were to limit the analysis to Scope 1 and 2, it would significantly underestimate the overall impact that Ford’s products have on carbon emissions.

Service organisations

The South Pole Group – a global organisation based in Zurich – undertook analysis of carbon emissions across sectors as displayed in the chart below. It highlights the significant impact on the carbon footprint of a number of industries if using the cradle-to-cradle (Scope 3) measurement style.

TruCost, based in the UK, also provides services to companies, investment owners and fund managers to help measure the carbon footprint of their businesses and investments. For TruCost this extends beyond carbon to other natural capital including water, fossil fuel reserves and exposure to stranded assets. Used by many fund managers, TruCost it believes it has natural capital data representing 93% of the global markets by market capitalisation.

The industry of carbon assessment is in its infancy, as is adoption across fund managers globally.  From the 50 existing Montreal Carbon Pledge signatories, two are Australian superannuation funds and three are Australian fund managers: BT, Australian Ethical Investors and Plato Investment Management.

BT measures and tracks the carbon footprint of many of its funds (under Scope 1 and 2).  In 2015 it measured its emissions as 217 tonnes of carbon dioxide equivalents per million Australian dollars of revenue (CO2e/$m).  By comparison BT refers to an Australian equity benchmark measurement of 214 (CO2e /$m).  In comparison VicSuper measured its 2014/2015 emissions (under Scope 3) at 340 (CO2e /$m), compared with the MSCI All Country World Index that sets a benchmark of 300 (CO2e /$m). Over time investors will be able to assess trends and compare them with more investment strategies.

It is also important to be aware that whilst a majority of fund managers are not signatories and are yet to reach the stage where they have all of the details in regard to their carbon footprint; many fund managers place very high importance on understanding and assessing the impact the business has on the sustainability of the environment, along with other governance concerns.

Sustainable funds and fund managers

Generation Global Share Fund for example, aims to deliver superior investment performance by consistently taking a long-term view and fully integrating sustainability research within a rigorous framework of traditional financial analysis. Environmental, Sustainable and Governance (ESG) issues are the cornerstone of this fund manager’s investment philosophy.

Other global fund managers including Walter Scott are not signatories to these types of commitments because they believe in the value of their independence, however they do place importance on ESG issues.  Walter Scott, for example, will look to reward those companies with clear reporting on carbon impacts and their plans to manage them.

Over recent years we have also seen Ausbil, manager of the Ausbil Australian Active Equity Fund dedicate substantial time and effort to assessing the impact of carbon emissions on its portfolio.  Ausbil has taken the view that capital intensive industries will become increasingly more costly to run and this will have an impact on earnings and cost projections for companies. This impacts the valuations Ausbil assigns these companies.

Progress is being made

So, “Is it was possible to get details on the carbon footprint of each investment in a portfolio?”  Unfortunately we are unable to provide all of the answers – but we were comforted that real progress is being made.

We anticipate there will be a time when we are able to provide clients with guidance as to the carbon footprint of their portfolio and strategies to reduce it, but for now we will continue our discussion with fund managers in regard to ESG issues and highlight the more progressive managers for consideration.