Measuring Carbon Footprint of Investment Portfolios

The management of carbon emissions in the future are of utmost importance to avoid a climate-related catastrophe and curb the rise of global temperatures to below 2º Celsius. The measurement of carbon emissions globally is necessary to remain within ‘carbon budget’. For this, it is necessary to establish environmental, social, and governance (ESG) integration guidelines that highlight the goal of achieving desirable portfolio ESG scores. The following typically serve as the foundation for the guidelines:

  • Investors must measure greenhouse gas (GHG) emissions of their assets in order to estimate the associated climate risk and analyse the environmental impact of their investments.
  • When combined with conventional financial analysis, ESG aspects can assist investors in recognizing a wider range of risks and possibilities and aid in making better investment decisions. The introduction of carbon footprint score in fund factsheets enables organizations to access carbon and ESG performance of their investments.

This article briefly covers some key aspects of carbon accounting an organization needs to understand before estimating its carbon emissions.

A. Calculation of carbon footprint

To calculate a fund’s carbon footprint, GHG Protocol standards must be used, which contain instructions and instruments for measuring GHG emissions. 92% of Fortune 500 businesses that reported their GHG emissions to the CDP used GHG Protocol criteria to measure and report their GHG emissions. Sulphur hexafluoride (SF6), hydrofluorocarbons (HFCs), carbon dioxide (CO2), nitrous oxide (N2O), perfluorocarbons (PCFs), methane (CH4) and nitrogen trifluoride (NF3) are the seven GHGs covered by GHG Protocol standards.

All emissions connected directly or indirectly to the operations of enterprises should be included in the quantitative range of GHG emissions.

  • Scope 1 – Direct emissions from sources owned/controlled by a company
  • Scope 2 – Emissions made indirectly through heat, electricity, cooling and steam acquired or bought by a company
  • Scope 3 – All other emissions made indirectly, including those related to a company’s product use.

To calculate a fund’s carbon footprint, carbon emissions of each company are tallied, weighted by enterprise value and weighted by their share in the portfolio. The indicator produced as a result counts the emissions produced for each unit of money invested in the fund. Since the measurements of scope 3 emissions have not been normalized yet, it cannot be trusted to be accurate enough for reporting. As a result, scope 1 and scope 2 emissions are currently the main focus areas in the computation of a company’s carbon footprint. The update of data and indicators will likely result in more accurate and well-founded calculations for Scope 3 emissions, increasing the relevance of the final calculation of carbon emissions.

Scope 3 emissions are critical and a major consideration for sectors, such as car manufacturing, where scope 3 emissions during the life of the car account for 98% of its emissions.

B. Major contributors to carbon emissions

GHG are largely emitted in a limited number of sectors, as per statistics from Intergovernmental Panel on Climate Change (IPCC):

  • Electricity & heat production (25%)
  • Agriculture & forestry (24%)
  • Industry (21%)
  • Transport (14%)
  • Buildings (6.4%)

Assessing and limiting emissions in these sectors are important to reach the target of near-zero carbon emissions by 2050. Near-zero carbon emissions call for investments not only in low-carbon sectors, but also in companies from the above-mentioned sectors that are the most ambitious and ingenious in terms of GHG emission reduction.

C. Interpretation of carbon footprint

Carbon footprint measurement quantifies emissions generated for each unit of currency invested in the fund and is demonstrated in tons of CO2 equivalent per million capital invested. Comparatively, one ton of CO2e is equivalent to:

  • 1 round trip to Paris, France/Faro, Portugal by plane per person (~3,300km) (or 293g CO2e/km)
  • Emissions generated by an average French car on covering ~3,800km (or 259g CO2e/km)
  • Circulating 28,571 e-mails with an attachment (or 35g CO2e/e-mail)

D. Calculation of global ESG score

The ESG score of a fund highlights how efficiently a portfolio performs on ESG versus its benchmark. The ESG global score aggregates the average ESG score of the companies in a portfolio, based on scores covering a number of parameters. The ESG scoring process comprises a rigorous metric selection for each sector, followed by comparing companies to their geographical and sectoral counterparts. A qualitative review is then conducted to make data corrections and overlay to the score based on the perception of a company’s performance on sustainability issues. The consolidated quantitative and qualitative ESG score ranges from 0 to 99. A score of 0 is assigned to companies excluded from investment.

E. Interpretation of ESG contribution and score

A company’s performance on an ESG indicator vs its peers’ is measured on the basis of ESG contribution. A positive contribution on an ESG indicator denotes that a company performs better than its peer average and vice-versa.

F. Measurement of coverage

A portfolio’s ESG score highlights whether the portfolio’s coverage is adequate and effective. An adequate coverage involves representation of all major assets and sufficient parameters to optimally represent all aspects of ESG.




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