A few days ago, ERAFP released the carbon footprint of its stock portfolio (1). It is a real breakthrough, since to our knowledge no institutional investor has ever released that kind of information, at least in France. In the major French newspapers this information was sadly reported in just 6 to 8 lines. This is further proof that the media just doesn’t understand the importance of promoting carbon footprint disclosure. These are the same newspapers that will comment at length about the interest of setting alternate traffic plans to reduce air pollution when Parisians can no longer see the Eiffel tower and are almost choking because of air pollution. For several days last week, one might have thought we Parisians were in Beijing…..
It is time to realize that the “business model” we have “prospered” with is running on empty and is not sustainable. In developed countries, how can you raise production to extract economies of scales when households are already largely equipped with all the cars, fridges and televisions they need? Furthermore, we know for sure that we should not take for granted access to raw materials that are getting increasingly expensive to extract.
Finally, we know that we have to prepare as soon as we can to reduce our consumption of fossil fuels if we want to maintain any hope of keeping the rise in temperature to under 2° by 2050.
Carbon footprints may sound “rustic” but they are a good proxy that would make it possible to assess how in every sector of the economy, businesses are preparing (or not) for this new environment. Assuming that, as a result, it would be in the interest of any company to gross the highest revenue possible for the least carbon footprint, pressure would increase for a subsequent overhaul in corporate business models.The moment a company sells a guarantee to use a service in lieu of selling a product, the business and sustainability logic is dramatically changed. Michelin, with its “Fleet Solution” (2) provides one of the best examples of how great the change could be. If instead of peddling tyres, you sell a guaranteed mileage for tyres to long range trucking companies, then you are immediately interested in training the drivers and maintaining tyre inflation, etc, since the fewer tyres you have to change the greater is your end profit. One may wonder how big could be the savings if we were able to extend that approach to the sale of a guaranteed temperature from 1st October to 1st May for big housing projects. It is sure that any company providing the heating for a multi-year contractual price would pay more attention to insulation or leaking windows. Investors like ERAFP will obviously then prefer to buy shares from companies that register the lowest carbon footprint for every million € of turnover.
Like it or not, and sooner (hopefully) rather than later, there will be a price on the negative externality that is CO2. It is the responsibility of long-term investors to ask for a communication of corporate carbon footprints now. And it should be on a broad basis. This means that for banks we should ask for the carbon footprint for every million of NBI (Net Banking Income). Better knowledge of the carbon intensity of a bank’s loans portfolio is of great interest because it gives an idea of the risk that the activities financed by those loans are bearing, and consequently how it may impact the credit risk of the portfolio.
The carbon footprint is a work-in-progress, but as a synthetic gauge of what every business is doing to improve its energy efficiency it should be
promoted. For its part, ERAFP is committed to calculating the carbon footprint of its assets, and comparing it to what a non-SRI investment policy would have delivered. As ERAFP’s SRI policy is implemented through a best-in-class approach, there is no sectorial bias (i.e. ERAFP invests in all economic sectors with the ambition to select the best performers).
The more investors that join the move to publish carbon footprints and demand them of their investee companies the faster the change we ask for will occur.We can produce and consume less and still make sound investments delivering good sustainable returns. Let’s start by asking businesses to communicate on a standardized basis their carbon footprints.
We will never stress enough the importance of being transparent.
Philippe Desfossés is CEO at ERAFP, the €18bn Paris-based French Public Service Additional Pension Scheme