Fossil fuel companies and those emitting large quantities of CO2 have come under increasing levels of scrutiny for their large and direct responsibility for climate change. For investors, such companies are increasingly seen as potentially risky investments, as they are likely to face increasing costs, shrinking profits, and a need to fundamentally redesign their business models.
"Carbon footprinting" a mutual fund means accounting for the quantification and management of GHGs. It is the first step towards understanding an investor’s impact on climate change. A carbon footprint is calculated by measuring and/or estimating the quantities and assessing the sources of various GHG emissions that can be directly or indirectly attributed to the activities of the underlying holdings.
To independently analyze and calculate carbon footprints for the mutual funds, we used the powerful "Carbon Footprint Analysis Tool" of yourSRI.com, which partners with South Pole Group to provide the information on corporate emissions worldwide - comprised of more than 40,000 companies.
The basis for a carbon footprint is the annual GHG emissions of each company within the respective fund. All direct operations, as well as energy and heat consumption, are measured in metric tonnes of carbon dioxide equivalent (tCO2e). The footprint is based on the full holdings of each fund per the most recently available Morningstar data, and the corresponding greenhouse gas emission data.
To allocate company GHG emissions to a fund, the value of shares held by the fund is set in relation to the company’s market capitalization. This ratio is multiplied with the emissions of the company, resulting in the emissions "owned" by the investor. By aggregating the information on a fund level, an investment carbon footprint for the fund is established and expressed in absolute and relative terms.
The described approach allows for the direct association and quantification of the emissions per investment and per fund. It also enables investors to compare the climate-intensity of one fund with another. For the ranking of the assessed funds, a relative metric has been applied to avoid any bias resulting from the size of the funds.
South Pole Group’s company GHG data covers the entire investable universe. This is achieved through collecting data from different data sources, data validation and estimation of missing data points with 800 proprietary models. Thorough stress tests of the data are conducted to ensure accuracy.
The relative carbon footprint expresses the greenhouse gas footprint of an investment sum. It is a normalized measure of a portfolio’s contribution to climate change that enables comparison with a benchmark, between portfolios, and between individual investments. The relative carbon footprint is measured in Total Carbon Emissions expressed as per currency invested.
Greenhouse gas (GHG) emissions are classified as per the Greenhouse Gas Protocol and are grouped in categories called Scope 1, Scope 2 and Scope 3.
Scope 1 GHG emissions are those directly occurring "from sources that are owned or controlled by the institution, including: on‐campus stationary combustion of fossil fuels; mobile combustion of fossil fuels by institution owned/controlled vehicles; and "fugitive" emissions."
Scope 2 emissions are "indirect emissions generated in the production of electricity consumed by the institution."
Scope 3 emissions are all the other indirect emissions that are "a consequence of the activities of the institution, but occur from sources not owned or controlled by the institution" such as commuting; embodied emissions from extraction, production, and transportation of purchased goods; outsourced activities; contractor‐owned vehicles; and line loss from electricity transmission and distribution". In the data, Scope 3 emissions are conceptually divided into (a) upstream emissions, i.e. emissions stemming from a company’s supply chain and (b) downstream emissions, i.e. emissions from product “use phases” during their life cycle.
With its online platform yourSRI.com, CSSP helps asset managers and asset owners worldwide to adequately manage risks related to ESG and Carbon issues. Investors can use the online tool to score mainstream mutual funds, portfolios, and mandates to efficiently benchmark and to compare investments with peers.
South Pole Group is one of the world’s leading climate action solution providers, measuring and reducing climate impact for its clients.
South Pole Group’s unique and powerful approach for measuring the climate impact of investment portfolios delivers the largest coverage, highest data quality and most transparent analysis in the market that is both standardised and can be customised to specific client needs.
The methodology was developed over three years with the Swiss Federal Institute of Technology and includes over 800 sector and subsector specific models – this allows for the calculation of companies’ GHG emissions according to the most relevant criteria.