"Inquisition about the carbon dioxide equilibrium in your investment holdings?"
The world of investment is increasingly focusing on the carbon footprint of funds, a measure that calculates the total CO2-equivalent emissions of a fund in relation to the total volume of the portfolio. This calculation is often made per million US dollars invested, providing a clear picture of the environmental impact of an investment.
However, according to Sabine Stahl, a prominent figure in the field, the lack of uniform measurement methods poses a challenge. With more companies publishing their CO balance, the diversity in calculation methods is due to the absence of regulatory requirements.
The carbon footprint can be given for each company and for the entire fund, using one of four calculation methods: total CO2 emissions, relative CO2 emissions, CO2 intensity, and weighted average CO2 intensity. The latter method, which considers the height of the investment in relation to the fund's volume, not the company's market capitalization, is particularly useful for both equity and bond investments.
To address this issue, Stahl suggests that companies should link the CO balance with the assets, allowing investors to track the CO intensity of the companies and sectors in their portfolios. This would provide a more accurate representation of the environmental impact of their investments.
Moreover, the increasing number of countries committed to reducing CO emissions presents challenges for companies that are large emitters of greenhouse gases. Investors may need to use additional research from third-party providers or conduct their own research due to the lack of standardization.
Standardized methods to determine the carbon footprint of investment funds and portfolios primarily use frameworks like the Partnership for Carbon Accounting Financials (PCAF). These methods combine carbon accounting data, portfolio ownership proportions, economic activity modeling, and standardized emission factors.
Key elements of these methods include calculating Scope 1 and 2 emissions from companies in the portfolio, handling data gaps, breaking down the portfolio into asset classes, sectors, and regions, using intensity measures and financed emissions footprints, incorporating data quality scoring, benchmarking and reporting, and aligning with broader sustainability disclosure frameworks.
Stahl emphasises the need for standardization of disclosure and calculation of CO emissions for reasons of trustworthiness and comparability among companies. Standardization would benefit investors, as it would allow for easier tracking of CO intensity in their portfolios and comparisons between portfolios.
While total CO2 emissions are calculated by summing the fund's share of the CO2-equivalent emissions of all companies in the fund, comparing footprints of funds of different sizes can be difficult. The sector of fossil fuels is highlighted as being affected, with the potential for increased costs and the existence of companies in this sector being at stake.
In conclusion, as the importance of sustainability continues to grow, it is worth considering the climate change risks in investments. Standardized methods for calculating carbon footprints provide transparency, enabling investors to make informed decisions and support decarbonization and climate-aligned investment strategies.
[1] Partnership for Carbon Accounting Financials (PCAF) [2] International Sustainability Standards Board (ISSB) [3] Corporate Sustainability Reporting Directive (CSRD) [4] Global Reporting Initiative (GRI) [5] International Energy Agency (IEA) Net-Zero Emissions by 2050 scenario (NZE 2050)
- To ensure fair comparison and trustworthiness, Sabine Stahl advocates for standardization in the disclosure and calculation of carbon emissions, which could be achieved through partnerships like the Partnership for Carbon Accounting Financials (PCAF).
- Incorporating climate-change considerations in financial investing is becoming crucial, as the sector of fossil fuels may face increased costs and potential risks due to the growing importance of sustainability and the need for decarbonization.
- Standardized methods for calculating carbon footprints, such as those developed by organizations like the International Sustainability Standards Board (ISSB), the Corporate Sustainability Reporting Directive (CSRD), the Global Reporting Initiative (GRI), and the International Energy Agency's Net-Zero Emissions by 2050 scenario (NZE 2050), can empower investors to make informed decisions that align with their climate goals and support environmental-science focused investments.
