Mekong Man recently attended a stimulating conference held by Swiss Sustainable Finance on carbon footprinting. He found it to be satisfyingly meaty compared to the fluffiness of content that can afflict gatherings on sustainable investing – the latter due mostly to the newness of this science, more than anything else.
SSF gave four carbon emissions experts (Inrate, South Pole, TruCost and MSCI’s ESG division) a portfolio of 100 large global stocks and asked them to each calculate the carbon footprint of the portfolio. Predictably, they each came up with different answers, the main reasons for discrepancy probably mainly due to two factors: 1) 22 of the 100 companies did not publish emissions data and another 16 only partial data, so estimations were required for these cases; and 2) estimating indirect emissions (i.e. of suppliers and customers) – which were included in the calculations – is also a dicey business, requiring a host of assumptions, and a consistency of methodology which is not there yet.
MM’s main conclusion from the conference was that, generally, investors’ consideration of CO2 emissions is making progress, both in terms of it becoming more mainstream among major global investors and in the metrics that are being used. This left him thinking that practitioners of sustainable investing had better quickly get as quantitative as they can on this subject in order to remain competitive in this field. To get so, those who don’t yet have it should build and keep a simple spreadsheet for their equity portfolio and watchlist that contains, based initially on direct emissions only – direct, so as to start with the basics; also, there is a case for saying stick to direct emissions only, since this will neatly suffice as and when we reach a stage where everyone in industry, and even consumers, are systematically counting and being counted:-
(1) Stock name
(2) CO2 emissions: Publish/Indicate privately/Do not say [specify which]
(3) CO2 emissions (m tonnes p.a., 2014)
(4) CO2 emissions per US dollar of sales (2014)
(5) CO2 emissions per dollar of sales (2014) for 1-3 leading global sector stocks
(6) CO2 emissions (2014) per dollar of current holding
Just covering these six pieces of data and keeping the spreadsheet routinely updated would represent an important advance from where many investors are currently. By having such a sheet, they would suddenly be able to have a strong idea of the hard answers to important questions such as:-
(a) How carbon intensive is the portfolio?, i.e. CO2 emissions per dollar of fund AUM. This number could be compared to MSCI and other indices that track carbon intensity; this number could also be tracked over time.
(b) One could rank the contributors to the fund’s footprint, i.e. item (6) ranked, for all portfolio stocks.
(c) By ranking item (4) by stock, you could see which stocks are operationally dirtiest or cleanest in terms of greenhouse gasses. The same exercise could also be done for other forms of emissions as well as water usage.
(d) Gap analysis compared to global sector leading companies (i.e. item (4) v (5)): this would be a rough guide only, since only 1-3 global leaders are specified in the above proposed spreadsheet in order to be realistic in terms of workload. This would shed important light compared to widespread current ignorance on this matter.
(e) How prevalent is disclosure, who is leading and who is lagging? (Item (2)).
(f) As time goes on, one would build a picture of stock-by-stock improvement, thus get a good view of leading movers and laggards, and be able to recognize “PR fluff” when it occurs – i.e. talkers as opposed to walkers.