Assessing portfolio climate impacts

In 2015, we published our first carbon footprint of the equity holdings across all investment portfolios managed by Rathbone Greenbank. This used a tool developed by our ethical research team to allow individual client portfolios to be footprinted. Here, we present the results of an updated carbon footprint analysis as part of our renewed commitment to the Montréal Carbon Pledge.

Our footprinting tool covers only the equity portion of investment portfolios managed by Rathbone Greenbank. Overall, equity holdings represented 35% of our total funds under management as at 31 December 2016.

Our analysis showed that for every £1m in equity investments managed, Rathbone Greenbank ‘owned’ 112.44 tonnes of carbon dioxide equivalent (CO2e). The same amount invested in the FTSE 350 would result in 241.74 tonnes CO2e being ‘owned’ – 53% higher.

We also looked at how our carbon footprint had changed since our last review in 2015. This showed that while the carbon footprint (per £m invested) of the FTSE 350 had fallen by 6% during the period, Rathbone Greenbank’s footprint had fallen by 25%.

This change is primarily driven by two factors: changes in the amount we invest in different companies and changes in those companies’ own carbon footprints.

For example, the utility group SSE plc is a significant holding within Rathbone Greenbank portfolios and has a relatively large carbon footprint in its own right. However, over the past two years, the company has cut its total carbon emissions by an impressive 48%, largely due to a reduction in the amount of electricity generated by coal-fired plants. This in turn contributed to the fall in Rathbone Greenbank’s own carbon footprint

- The carbon footprint includes only Scope 1 and Scope 2 emissions, as defined by the Greenhouse Gas Protocol. This is due to widespread gaps in company reporting of Scope 3 emissions and a desire to compare like-for-like company data. [Scope 1: All direct greenhouse gas (GHG) emissions from sources owned or controlled by the company, e.g. emissions from vehicles owned by the company. Scope 2: Indirect GHG emissions from consumption of purchased electricity or heat. Scope 3: Other indirect emissions, such as from business travel or waste disposal.]
- CO2e is a standard unit for measuring carbon footprints. It expresses the impact of each different greenhouse gas (including methane, ozone and nitrous oxides) in terms of the amount of CO2 that would create the same amount of warming.

Improving portfolio footprinting techniques
To date, efforts have focused on developing and refining methodologies for footprinting equity investments. However, the majority of client portfolios consists of a mix of asset classes, including equities, fixed income investments (e.g. government and corporate bonds), and diversifiers (e.g. property or infrastructure funds). This means that current tools are only able to report on a portion of the overall portfolio value.

Recently, there have been some interesting developments in carbon footprint analysis for other asset classes and we are following these with interest. Challenges that need to be addressed include:

•    significant limitations in availability of carbon data among companies not listed on a stock exchange;
•    how to apportion a company’s carbon emissions to debt investors, and;
•    how to avoid double-counting of emissions between debt and equity holders.

However, these issues are not insurmountable and, as interest in portfolio carbon footprinting grows, we expect to see further innovation in tools and data sources for investors to use.

Regulatory developments
Ahead of the Paris climate talks in December 2015, over 120 investors (including Rathbone Greenbank) with over $10 trillion in assets under management signed the Montréal Carbon Pledge. This initiative seeks to demonstrate widespread investor commitment to measuring and responding to the climate impacts of investments.

The Task Force on Climate-related Financial Disclosures has built on this momentum by including a specific recommendation for portfolio carbon footprinting in its recently released reporting guidance for financial companies.

Voluntary measures such as this are important in demonstrating climate leadership among investors, but regulatory interventions are crucial to ensuring that laggards do not fall too far behind.

In January 2016, France became the first country in the world to require institutional investors such as pension funds and asset managers to report annually on the carbon footprint of their investment portfolios. As the world continues to work toward the goals set out in the Paris Climate Agreement, it seems likely that other countries will follow suit.