"Inquire about the carbon dioxide emissions associated with your investment holdings."
In the late 1990s, the GHG Protocol was introduced to set accounting standards for measuring and managing greenhouse gas (GHG) emissions. While individual companies currently record their emissions in CO-equivalent terms, the focus is shifting towards measuring the carbon footprint of investment funds and portfolios.
This shift is crucial as countries around the globe commit to reducing CO2 emissions, posing challenges for companies that are large GHG emitters. The carbon footprint of an investment fund or portfolio can be derived from the greenhouse gas emissions of the companies it invests in.
Methods for Determining Carbon Footprints
Several methods have been developed to determine the carbon footprint of investment portfolios. These methods are primarily based on calculating financed emissions linked to the investments held.
- Partnership for Carbon Accounting Financial (PCAF) Standard The PCAF Standard provides a methodology specifically designed for measuring financed emissions in investment activities. It extends traditional corporate carbon accounting standards to capture emissions financed by financial institutions through investments, loans, and underwriting activities.
- GHG Protocol and Its Extensions The Greenhouse Gas (GHG) Protocol underpins most corporate and financial emissions accounting. For investment portfolios, it focuses on Scope 3 Category 15, which relates to financed emissions.
- The Bilan Carbone Method Developed by the French environmental agency, this method requires reporting of all emission scopes without exclusions and mandates the inclusion of all company facilities plus creating a decarbonization plan.
- ISO 14064 Series ISO 14064 complements the GHG Protocol by establishing minimum standards and providing guidance on creating emissions inventories, project-based accounting, and data verification.
- Portfolio Carbon Footprint Calculations Using Emission Intensity Metrics Some asset managers calculate portfolio carbon footprints by summing investee companies’ emissions scaled by the proportional ownership or exposure.
- Steps and Tools to Support Emissions Accounting in Finance Methodologies often involve compiling data through GHG inventories, forecasting baseline emissions, setting carbon budgets, applying pricing on carbon emissions, analyzing risks and opportunities, engaging stakeholders, and identifying offsets.
The Importance of Standardization
As the awareness of climate change risks in investments grows, there is a growing need for standardization in the disclosure and calculation of CO2 emissions. Sabine Stahl, an advocate for this standardization, emphasizes the importance of trustworthiness and comparability among companies.
The CO-intensity method, which measures emissions in relation to the performance of the companies in a fund or portfolio, is a key approach in this standardization. This method considers the ecological efficiency or inefficiency of a company in relation to its business performance.
The weighted average CO-intensity method, which determines the CO-intensity of different companies in which a fund invests by the height of the investment in relation to the fund volume, is more flexible and can be used for both equity and bond investments.
Investors may use additional research from third-party providers or their own research if standardization is not implemented.
Tracking Carbon Footprints for Investment Decisions
By linking the CO-balance to the assets, investors can track the CO-intensity of the companies and sectors in their portfolios and compare portfolios between each other. This information is valuable for making informed investment decisions that consider both financial performance and environmental impact.
- The PCAF Standard, designed for measuring financed emissions in investment activities, offers a methodology that extends traditional corporate carbon accounting standards.
- The Greenhouse Gas (GHG) Protocol, which underpins most financial emissions accounting, focuses on Scope 3 Category 15 for investment portfolios, relating to financed emissions.
- Investors tracking carbon footprints for informed decisions can use the weighted average CO-intensity method, which determines the CO-intensity of different companies in a portfolio by the height of the investment in relation to the fund volume, for both equity and bond investments.
