1 July 2016
Could you reduce your investment carbon footprint?
We chat with Neville White, head of social responsible investing at EdenTree
As pioneers of responsible investing, EdenTree's Elite Rated Amity UK fund is the longest established ethical fund in the UK and has been run by Sue Round since 1988.
In a recent interview, EdenTree head of social responsible investing, Neville White, discussed the reasons behind the company's decision to commission their first carbon footprint for the Amity UK fund, as well as the encouraging outcome.
Why should investors be concerned about carbon emissions?
Carbon emissions are directly linked to climate change, which already affects our environment, society and economy. As shareholders, we part-own the companies we invest in. From this perspective, we also own the emissions generated by those companies and have a role to play in encouraging businesses to manage their emissions and implement a robust climate change strategy. In a carbon-constrained world, businesses that are managing their impacts have a competitive advantage and are better insulated against increasing regulatory requirements.
How does EdenTree manage climate change risks?
When looking for investments, the Amity 'positive pillar of environmental management' is key to addressing a business’s ability to reduce its impact on the environment and to limit its contribution to greenhouse gas emissions. We look for companies that show a good understanding of their environmental impact and have a strategy in place to manage it.
In 2015, EdenTree became a member of the Institutional Investor Group on Climate Change (IIGCC), which brings together 120 European members with total assets under management of €13 trillion. IIGCC aims to engage with public policy makers on behalf of investors in order to facilitate the transition to a low carbon economy.
Arising out of our membership of IIGCC we decided to commission South Pole Group, a Swiss based climate action solution provider, to assess the carbon footprint of our Amity UK fund. This first carbon footprint gives us an insight into the fund’s emissions and the associated risks.
What is a carbon footprint?
A carbon footprint measures carbon emissions. In an investment portfolio, total tonnes of CO2 are calculated for all individual holdings and proportionally allocated to the shareholders.
For our footprint, we have looked at the financed emissions and to what extent the individual companies within the portfolio contribute to the fund’s carbon impact. The total footprint is then articulated as the total tonnes of CO2 financed by the assets under management of the fund.
Another way to look at the results is CO2 emissions per £ invested, which is helpful for comparison purposes and equates exactly with the size of the investments.
Where does the information come from?
The footprint is based on publicly available information disclosed by the companies in their annual sustainability reporting or in their submission to the Carbon Disclosure Project (CDP). Our independent provider South Pole validates the trustworthiness of the available data and makes assumptions for the minority of companies where data is not available.
Disclosure of carbon emissions has significantly improved over the last few years and international reporting standards have emerged. The Amity UK fund footprint was based on 78% available data, with 22% being subject to assumptions*.
What are the benefits of knowing our carbon footprint?
The carbon footprint supports our overall climate strategy, which is to offer clients a range of responsible investment products that are also potentially low carbon. It helps us too with risk management, enabling us to analyse and understand the main contributors to low and high carbon intensity within the fund.
We will then engage with the outliers. Questions about climate change, carbon emissions and fossil fuel divestment are among the most frequent topics clients ask us about. The footprint thus presents a useful tool in reporting to clients on a material risk, based on an independently verified process.
So what does the carbon footprint for the Amity UK fund look like?
We intuitively expected our Amity UK fund to be less carbon intense than its benchmark, the FTSE All Share index, and South Pole’s analysis has proven just that. The analysis provides a useful breakdown per sector, which will help us assess the risks and instruct future engagement. Overall, the fund has an annual carbon impact of 13,146 tonnes of CO2e, or is 58% less carbon intense than an equivalent investment in the benchmark.
How do different sectors contribute to the carbon footprint?
The Amity UK fund is underweight in the energy sector, as this is screened out, while the benchmark is strongly biased towards those heavy emitting sectors. This contributes significantly to the positive results of the fund.
Careful stock selection also means that despite investments in industrials and materials, which are energy intensive, our stock allocation to those sectors also contributes to the lower carbon footprint of the fund.
What is next on EdenTree’s climate change agenda?
The outcome of the first footprint is very encouraging. Despite an overall portfolio that is relatively carbon light, a small number of holdings are responsible for half of the fund’s emissions. We have started a constructive dialogue with those companies, encouraging them to make further progress on energy efficiency, using alternative production methods and switching to more climate friendly energy sources. We will actively monitor their progress.
Meanwhile, through our partnership with IIGCC, we participate in public policy lobbying where appropriate, in order to contribute to the transition to a low carbon economy.
*The footprint of the FTSE All Share Index is based on 75% available data.
Where to next?
- You're not as diversified as you think
- Core-satellite investing: an active approach
- How to use FundCalibre
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Neville's views are his own and do not constitute financial advice.
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