Annual global carbon emissions continue to increase, and scientists are increasingly convinced we are approaching limits to how much more carbon we can burn as a society and stay within a safe degree of the future effects from what is expected to be a changing climate. Institutional Investors at the same time now own a majority of public companies, mostly in a “business as usual” capacity, in effect locking in the status quo. Measuring and reducing the carbon footprints of equity portfolios and other assets owned emerges as a potentially important effort to encourage businesses to reduce their own carbon footprints through a resulting positive dynamic in a race for invested capital. Such carbon footprinting however can only achieve maximum effect through an optimization of performed techniques combined with an understanding of the strengths and weaknesses of the data. It is essential to pinpoint and not overlook the largest opportunities for decarbonization, which most current techniques do not accomplish.
Efforts to calculate the carbon footprint of equity and other portfolios trace back to Henderson Global Investors and Nick Robins working with Trucost on a report entitled “How Green is My Portfolio?” in 2005. Subsequent related efforts include a Sustainable City Award winning analysis of the Carbon Footprint of UK unit and investment trusts in 2006 by Cary Krosinsky and Trucost looking at the relative carbon intensity of portfolios comparatively for the first time. Green Century became the first US mutual fund to publish a carbon footprint, most recently heralding the fund as being “half the carbon of the S&P 500.”
Fast forward to September 2014, and we have now a Montreal Carbon Pledge initiated by PRI, and a similar call from UNEP to build a Portfolio Decarbonization Coalition seeking to “reduce the carbon in portfolios by hundreds of billions of dollars.”This exciting initiative, in order to have maximum effect, needs to be optimized, for reasons we will start to explore in this piece, to ensure that:
a) The largest opportunities for decarbonization are fully factored into these considerations and are not overlooked. Most carbon footprinting techniques currently overlook many of the largest categories of such opportunities.
b) The strengths and weaknesses of present carbon footprinting and the parallel state of ecological economics data is fully understood.
c) Pension funds and others signing up to the Pledge have the best chance to truly decarbonize the economy meaningfully through this practice.
Weaknesses in carbon footprinting techniques as presently practiced – largest opportunities to decarbonize missed/not prioritized
Ecological economics data gathering techniques use the largely accepted and completed GHG Protocol to either estimate or precisely measure the carbon dioxide and other greenhouse gas emissions of companies and their Scope 1 (operations), Scope 2 (purchased electricity) and Scope 3 (15 categories of indirect emissions) footprints.
Scope 1 and Scope 2 is the most robustly available data, even if not comprehensive (more so in some geographies than others), and not fully audited and verified. The state of reliability and completeness of Scope 1 & 2 data can be analyzed and understood by geography and by sector, which is important to understand vis a vis which portions of owned portfolios can be measured on their Scope 1 & 2 footprint. However the larger weakness of carbon footprinting techniques is involving Scope 3, especially use of products, often ignored while also being for many sectors the largest opportunity for
decarbonization by far. A sample analysis of each sector shows the largest opportunity for decarbonization as follows, and whether current carbon footprinting practices reflect these understandings or not:
Sector: Auto & truck manufacturing
Largest opportunity: Use of vehicles
Reflected in footprinting: No
For example, take Ford, whose own reporting clearly demonstrates that fully 90% of their carbon footprint comes from the use of their vehicles on road. Carbon footprinting techniques that do not factor in use of products (such current footprinting techniques do not) miss the majority of the category of most concern.
Other sectors show similar situations where the largest component of the carbon footprint of business is simply missed by currently practiced techniques:
Sector: Financial services
Largest opportunity: Investments
Reflected in footprinting: No
Financial services companies, for example, need to include investments to properly reflect their footprints as per the GHG Protocol. Equity investments alone cause such organizations to have a very high footprint (see Newsweek Green Rankings for 2012 ) whereas carbon footprinting of portfolios without investments make financial services companies seem ‘lighter’ than average, and in fact many SRI funds prioritize and overweight this sector.
Let’s take another:
Sector: Consumer goods
Largest opportunity: Energy in use of products
Reflected in footprinting: NoConsumer goods companies such as Procter & Gamble have found through a “cradle to cradle” analysis that the heat generated while washing clothes is responsible for the largest component of their footprint by far, hence they prioritize cold wash clothes to have the largest positive impact possible. Yet, carbon footprinting techniques would not show this if not including use of products, which they do not.
Hence, there is an urgent need to develop a list of the largest opportunities to decarbonize by sector so that investment dollars can prioritise by opportunity, and which most present day carbon footprinting does not currently consider. In fact, carbon footprinting techniques miss the majority of the footprint of many sectors, either due to technique or lack of data, and at a time when it is urgent to decarbonize the economy by all means possible. There would seem to be scope for important further research to determine by sector what the largest opportunities are to decarbonize, and perhaps as well, what is less important to focus on.
The urgency to decarbonize per the largest priorities
Estimates show that we are increasingly emitting carbon dioxide at an annual rate now approximating 35 or more gigatonnes (Gt) every year, giving us possibly 20 to 30 years at most to begin seriously transitioning this annual emitted amount downward, or face the likelihood of what the science tells us will result in climatic disaster. The Carbon Tracker Initiative in conjunction with the Grantham Institute estimated in 2013 that we can burn an additional 900 Gt from 2013 through 2049 and have an 80% chance of possibly avoiding such catastrophic damage.
A transition path can and should be designed, and which portfolios can track and follow, which is decadal in nature and which takes annual emissions first from the 30-40 Gt/year range then down to 25 Gt/year through the 2020’s, and then to 20 Gt in the 2030’s and 10 Gt after that, giving time for other technologies to develop and mature along the way, keeping us within the range of safety.
There is an urgent need to annually decarbonize the economy towards the largest categories of opportunity by sector in order to ensure that we have the best possible chance of staying on the transition path of maximum business efficiency. Current portfolio carbon footprinting techniques miss much of the footprint of two of the main four areas of commerce, those being transportation and property (commercial buildings and residences). Carbon footprinting using existing data is better at helping understand industry, but does it inform on which companies will be winners and losers, and why and when? Similarly, energy generation and agriculture – two rapidly evolving segmentsof the economy – arguably require a more granular look to understand who may emerge as winners in the new sustainability paradigm. With Institutional Investors, possibly now owning over 70% of public companies, their participation to truly decarbonize the economy is essential. Developing techniques to truly decarbonize by asset class including equity is now an essential component of success. We applaud UNEP and PRI for taking this bold step towards building a coalition and asking asset owners to pledge to perform carbon footprinting on the back of the first efforts of the field. It is essential for this effort to have the necessary effect on decarbonization that will ensure that these efforts are meaningful and positive for shareholders and society. Such clarity of technique and prioritization by opportunity category will help ensure that this effort creates the positive dynamic necessary to achieve its goals.
Cary Krosinsky is a teacher, advisor and author, currently teaching a seminar at Yale College on business and sustainability.
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