Demonstrating your portfolio’s carbon footprint to investors

Determining the likely impact of rising carbon prices, identifying the potential for stranded assets, and addressing growing demand for financing the transition to a low carbon economy are just a few of the reasons prompting investors to analyse their exposure to greenhouse gas emissions.

Assessing the carbon footprint of a portfolio is the first step in tackling the investment implications of climate change. It sets a baseline to inform future actions, which can range from reporting and engagement to decarbonisation and integrated risk management.

What is a portfolio carbon footprint?

The carbon footprint provides a snapshot of each portfolio company’s greenhouse gas (GHG) emissions proportionate to the amount of stock held in the portfolio.

It measures the carbon emitted by portfolio companies over the prior fiscal year which, by nature, makes it backwards looking. While this helps to establish a baseline, the historical trend of the portfolio’s footprint reveals whether the held companies have had increasing or decreasing emissions over time.

Measuring a portfolio’s carbon footprint

The most detailed example of measuring the carbon footprint of a portfolio would be measuring the GHG emissions of the companies in which the investments are held. These are also known as financed emissions and need to be understood if a company is to effectively assess its carbon footprint and disclose its management of sustainability risks and opportunities.

The Greenhouse Gas Protocol classifies carbon emissions across 3 “Scopes”:

Scope 1
All direct GHG emissions from sources owned or controlled by the company.

Scope 2
Indirect GHG emissions from consumption of purchased electricity, heat, or steam.

Scope 3
Other indirect emissions in the value chain not owned or controlled by the company, such as goods and services purchased from third parties, transport-related activities, electricity-related activities not covered in Scope 2, outsourced activities, waste disposal, etc

Why measure a portfolio’s carbon footprint?

The carbon footprint is a useful quantitative tool for understanding, measuring, and managing carbon risks and opportunities of portfolios and assists in the creation and implementation of a broader climate change strategy. It allows you to compare it to global benchmarks and track emissions, which can be a valuable tool for increasing transparency in all strategies as well as a tool for those funds seeking to demonstrate commitments to addressing climate change over time.

Assessing a carbon footprint also helps portfolio managers:

• Understand carbon exposure risks that can affect financial returns
• Optimise and protect investments with targeted transactions
• Demonstrate sustainability and fighting climate change with responsible investments
• Establish a point of difference by offering low-carbon or climate neutral products.
• Provide a source of data to facilitate investor engagement activities

Benefits of disclosing a portfolio’s carbon footprint to investors

As the demand for sustainable investment options increases, there are clear business benefits of disclosure to investors. These include:

• Improving and protecting your company’s reputation through building trust and demonstrating transparency
• Improving your competitive advantage by offering solid, long-term investment options that align with investor sustainability concerns
• Staying ahead of regulations by preparing for imminent mandatory reporting requirements
• Quickly identify emerging trends, risks and opportunities
• Track and benchmark progress to demonstrate the value of your portfolio to existing and prospective investors.

Most importantly, taking a proactive stance on disclosure is a necessary step to drive environmental action.

Head of Responsible Investment and Real Assets at Zenith Investment Partners, Dugald Higgins, noted that

Climate change is a risk that cannot be diversified away. Understanding where stress points lie in terms of both physical and transition risks in portfolios is an imperative for fund managers. Access to data to inform ESG risks and opportunities is essential.

Need help?

Assess the ESG & Carbon footprint of your funds and portfolios with FE fundinfo’s yourSRI platform. This ‘one-stop’ solution provides a wide range of search, comparison, assessment, and screening functions.

In addition to the screening* on the product (fund) level, yourSRI is able to screen the greenhouse gas emissions of individual portfolios for asset managers, banks, insurance companies, institutional investors and other asset owners.

With an extensive database compromised of more than 40,000 companies, yourSRI & ISS ESG provides you with the most complete information on corporate emissions worldwide.

Simply upload your portfolio and within minutes it provides you with a detailed overview of the carbon footprint of your investments.

Find out more HERE

* The portfolio screening works best with equity portfolios. Additional coverage for corporate fixed income instruments as well as a fund-look-through module will be available soon.