Portfolio carbon footprinting and climate risk (2019)

The Montréal Carbon Pledge encourages investors to monitor, disclose and reduce the carbon footprint associated with their investment portfolios.

As part of our ongoing commitment to the Montréal Carbon Pledge, Rathbone Greenbank has disclosed the carbon footprint associated with its direct equity holdings. We believe transparency is a necessary first step in the process of managing and mitigating the carbon impacts of investment portfolios.

As at 31 December 2019, for every £1 million in equity investments managed, Rathbone Greenbank ‘owned’ 85.73 tonnes of CO2e. The same amount passively invested in the FTSE 350 would have resulted in 244.56 tonnes CO2e being ‘owned’ – a difference of 65%. Direct equity investments comprised 35% of Rathbone Greenbank’s total assets under management at 31 December 2019.

This difference has again increased, showing that Rathbone Greenbank’s equity holdings continue to decarbonise at a faster rate than the wider UK market. 

Source: Rathbone Greenbank, based on annual company responses to CDP

The year-on-year improvement within the equity portion of Rathbone Greenbank’s portfolios can be explained by an overall reduction in the annual carbon emissions of investee companies and stock selection that avoids the most carbon-intensive companies. It is disappointing to see a reversal in the trend of decarbonisation among FTSE 350 constituents (excluding investment trusts). Our analysis suggests that this is due to less reliance on estimates together with approximately half of FTSE 350 companies increasing their carbon emissions compared to the previous year. 

Rathbone Greenbank’s ethical, sustainable and impact research team continues to work on ways to improve the scope of its carbon footprint tool. It is seeking to include fixed income investments and managed funds within the calculation, while avoiding double-counting and retaining the ability to benchmark meaningfully against indices. One way of achieving this is to use a weighted average carbon intensity method, which measures a portfolio’s exposure to carbon intensive companies based on each holding’s CO2 emissions per million pounds of sales (as opposed to simply the percentage of shares owned) and adjusting this according to its weighting within a portfolio.

Engaging for change – climate sustainable assets

Portfolio carbon footprinting does not take into account the beneficial products and services that may be provided by investee companies. For example, a manufacturer of insulation materials will emit a certain number of tonnes of CO2 per unit of production but its end products may reduce industrial or household emissions by many times as much over their lifetime.

Calculating the carbon footprint of our investments forms only one part of a holistic approach to mitigating climate change and supporting the transition to a low-carbon economy.

Another key element is our engagement programme, which this year includes contributing to the Paris Aligned Investment Initiative (PAII). Launched in May 2019 by the Institutional Investor Group on Climate Change (IIGCC), this collaborative investor project aims to explore how asset owners can align their portfolios to the goals of the Paris Agreement.

Rathbone Greenbank has been an active member of the PAII’s listed equities and corporate fixed income workstream. This group has looked at approaches and methodologies that could be used to transition portfolios as well as discussing what an appropriate company engagement strategy would look like. The PAII’s draft framework is due to be published in June 2020 and a follow-up portfolio test report in September 2020.

We have also been engaging directly with companies to demand better quality climate-related disclosures and encouraging them to set long-term, science-based targets. As part of this, we assess whether an organisation is ‘aligned’, ‘partially aligned’ or ‘misaligned’ with the concept of a ‘climate sustainable asset’, and whether it is directly or indirectly supporting the move to a low-carbon economy. This includes companies with a majority of their revenues derived from climate mitigation technologies and/or renewable or low-carbon energy development, as well as those that have robust policies and targets in place and can demonstrate year-on-year reductions in their own greenhouse gas emissions.