Measuring a carbon footprint
Environmental information about investments is being used in portfolio analysis, finds Nina Röhrbein
Measuring company carbon footprints is gaining increasing importance. That at least is the message from Style Research, an international style, risk and performance analysis service provider. It has integrated such data from environmental research organisation Trucost into its Portfolio Analyzer software to enable its clients to assess the environmental impact or carbon intensity of their investment portfolios.
The carbon footprint, which is calculated and supplied by Trucost, is compiled from reported and modelled data that assess the direct and first-tier supply-chain greenhouse gas (GHG) emissions of more than 4,500 companies worldwide. The calculations include the six GHGs covered by the Kyoto Protocol on climate change - CO2, CH4, N2O, HFCs, PFCs and SF6 - which are converted into tonnes of carbon dioxide equivalents (CO2e) on the basis of a global warming potentials (GWP) index calculated by the Intergovernmental Panel on Climate Change.
Each company's carbon footprint or intensity is calculated as its CO2e divided by its turnover.
"We analyse the carbon emissions relative to sales because you can then compare companies within as well as across industries," says Gregory Elders, head of research at Trucost.
Without requiring any additional data subscriptions, users of the Portfolio Analyzer can then conduct portfolio-level and sector-level analyses of their investments.
"Our portfolio analysis systems give investors and asset managers the opportunity to analyse their investments from the perspective of a variety of individual factors," says Robert Schwob, chief executive of Style Research, which has 250 institutional investor clients in 25 countries. "It was straightforward for us to integrate Trucost's data into our existing portfolio analysis systems, so clients can now review their portfolios according to key financial as well as non-financial criteria, incorporating carbon emissions. We believe it is very important for fund managers to know the impact of their investments on carbon emissions and to be able to assess the carbon efficiency of their portfolio. This information will help them do their jobs more comprehensively."
He adds: "There are two levels of data distribution; the portfolio and sector level and the individual stock level. The portfolio and sector level enables asset managers to analyse their portfolios and compare their total or sector level carbon footprints against their respective benchmarks. Since we do not reveal any of Trucost's primary data at this level and only show derived, aggregated analysis, we do not have to apply an extra charge. Nevertheless, this information enables pension fund trustees to determine whether their managers are acting responsibly on their behalf and offers managers the ability to report to their clients on the overall carbon impact of their portfolios and, broadly, on their choice of company investments within sectors. For the primary information - the underlying carbon emissions data for individual companies - clients will need an agreement with Trucost for us to be able to distribute it through our software. And for that, understandably, there will be an extra charge."
Heavily polluting sectors have performed particularly well over the last few years and consequently investors are reluctant to underweight them. "Choice within sectors is important," says Schwob. "The carbon footprint data enables asset managers to see whether the companies in which they invest are high polluters or more efficient producers. And this more judicious investment offers more than just conscientious competitive advantages; recent research indicates that, within the most polluting sectors, investments in the more carbon efficient companies outperform. There is always the risk that investors or asset managers might not like what the mirror shows them; but we only deliver the information. We do not tell anyone how to run their business. Nonetheless, we hope that the clear data that we provide will be used by investors and asset managers as they communicate information about investments and work towards establishing policy."
Schwob says demand for such data had been on the wish list of many institutional investors and consultants. "But getting this type of environmental information about investments was very cumbersome. Now it is much more straightforward as it is integrated within standard portfolio analysis software."
Style Research has had a positive response from its clients so far. "The first interest following the carbon footprint data integration in early May came from the US, continental Europe and the UK, regions with strong shareholder pressure. But since then our distributors have also seen interest from South Africa and south-east Asia."
Style Research is in a working partnership with Trucost and, according to Schwob, the company is considering putting more elements of Trucost's data in a variety of its services in the future.