The Most Important Drivers of Your Portfolio Carbon Footprint
Your Portfolio Carbon Footprint can be the single most important driver of your individual carbon footprint. We will look into the main global drivers of climate change and show how investors can reduce their carbon footprint through climate-conscious investments
Intro
To make the right decisions, sustainable investors should be aware of the consequences and impact of their investments. One way of evaluating the impact of investments is by looking into the portfolio’s carbon footprint.
The carbon footprint is directly connected to climate change and the SDG 13. Out of the Sustainable Development Goals, Climate Action (SDG 13) requires the “most urgent action” and the Sustainable Development Goals Report 2019, states that:
“the natural environment is deteriorating at an alarming rate. Land degradation affects one-fifth of the world’s land area, ocean acidification is accelerating, sea levels are rising, and one million plants and animals’ species risk extinction.”
United Nations, Sustainable Development Goals Report 2019
Moreover, SGD 13 goal is strongly related to other SDGs as the impacts of climate change will be “catastrophic and irreversible” and will “affect the poor the most.”. As a consequence, by not achieving the goals of Climate Action (SGD 13), it will be much more difficult to achieve the goals related to poverty (SDG 1), hunger (SDG 2), access to water (SDG 6), terrestrial and marine ecosystems (SDG 14 & 15), health (SDG 3), and gender equality (SDG 5). SDG 13 also has strong synergies with clean energy ambitions (SDG 7) and sustainable industrialization (SDG 9).
In this blog post, we will identify the main drivers of global GHG (greenhouse gas) emissions, break it down into the most effective actions from an individual perspective, and present the available calculation methods to assess investors’ portfolio carbon footprint.
Who is really responsible for Climate Change?
To understand who is behing climate change and GHG emissions, let’s look at the Total GHG emissions, which includes emissions from all greenhouse gases. The top 3 most polluting GHGs are carbon dioxide (CO2), methane (CH4), and nitrous oxide (N20). Other GHGs with less presence in the atmosphere are sulfur hexafluoride (SF6), hydrofluorocarbons (HFCs), and perfluorocarbons (PFCs).
In 2016, total greenhouse gas emissions reached 49.4 billion tonnes of CO2e. We can look at those emissions from different angles. Below we will identify the major contributors from the perspective of countries, sectors, and companies.
By country: from the total GHG emissions, in 2016, China contributed to 23.5% (11.6 billion tCO2e), US to 11.7% (5.8 billion tCO2e) and European Union to 6.9% (3.4 billion tCO2e).
By sector: Electricity & Heat are responsible for 30% of GHG emissions, followed by Transport with 16%, Manufacturing & Construction and Agriculture with 12% each.
By company: From the two charts above, one could quickly conclude that the main contributors to climate change are China, the US, and the European Union; and that emissions are mainly driven by the use of electricity, heat, and transportation. However, let us look as well at the actors behind those sectors, the corporations with the highest carbon emissions.
In 2017, the Carbon Disclosure Project released the Carbon Majors Report, exposing 100 fossil fuel producers responsible for 71% of global industrial GHG emissions. It was the first comprehensive study, at a global level, to disclose GHG emissions responsibility from the producer-side, including Scope 3 emissions (GHG emissions from ‘use of sold products’)
The graph below ranks the Top 20 Oil & Gas producers by GHG emissions. As we can see there is a strong presence of public investor-owned companies and state-owned organizations.
Note: Most fossil fuel companies do not disclose Scope 3 ‘use of sold products’ emissions, which for fossil fuel producers can account for 85-90% of total company emissions. Scope 3 emissions result from the downstream combustion of products sold, such as coal, oil, and gas for energy purposes.
The Responsibility Debate: Producers vs. Consumers
Some companies argue that consumers are the ones responsible for climate change and should be accountable for Scope 3 emissions since they are the ones demanding and using the products. For example, car manufactures, and oil and gas producers will account for their emission from Scope 1 and Scope 2 only, leaving Scope 3 emissions out of the equation.
When comparing companies’ emissions (e.g. Tesla vs. Volkswagen), this approach would impact the analysis and result in distorted conclusions, since internal combustion vehicles have lower emissions during production when compared to electrical vehicles. During the use of the product (Scope 3), electric vehicles have a clear advantage against diesel and petrol vehicles (see image below).
More: Would you like to know if Tesla is sustainable? Check our Tesla analysis here
Despite being the consumers of products, individuals are not the ones deciding which technologies to implement or how long a company’s green energy transition should take. Therefore, individuals alone will have limited power to implement the changes required by SDG 13’s target and goals.
When we look at the dimensions of the emissions, the average per capita GHG emissions are only 5 tCO2e per year, while companies’ and countries’ emissions are at the level of millions and billions tCO2e. Individuals are limited to actions related to their consumption style, being smarter when investing, and voting on climate-conscious politicians.
The huge reduction in GHG emissions needed will require stronger direction and action from powerful institutions. Companies and governments need to take aggressive measures towards a cleaner and greener planet.
Governments need to implement adequate legislation, make polluters accountable, and design incentives to boost investments in climate change mitigation.
Companies must pursue decarbonization of their operations and supply chains, reduce the carbon footprint of their products, processes, and services, and increase their investment in the development of clean technology and sustainable business models.
Despite the limited impact of individuals when it comes to climate change, we should not disregard their importance – as investors and as consumers – when engaging in climate action, inspiring their local communities, and leading by example. In the section below we look at climate action from an individual’s perspective.
The Most Effective Climate Action for Individuals
Global GHG emissions per capita are around 5 tCO2e per year. However, the global distribution of GHG emissions is extremely uneven and is correlated with income inequality. Below there is a table of GHG emissions per capita for 4 selected countries:
| Selected coutries | tCO2e per capita per year |
|---|---|
| United States | 14.8 |
| China | 6.7 |
| Denmark | 5.9 |
| Brasil | 3.6 |
| World | 4.9 |
Going one step further and looking at how emissions relate to income levels, we have the staggering image below:
While the richest 10% of the population is responsible for almost 50% of total consumption emissions, the poorest 50% of the population is responsible for only 10% of total consumption emissions. According to Oxfam’s Extreme Carbon Inequality, this indicates that the top 10% have an average carbon footprint 11 times higher than the bottom half of the population.
Therefore, it is not sufficient to look at the main drivers of GHG emission per capita. We need to distinguish it by income level. Low-income countries and individuals do not contribute much to climate change. The bottom 1-2 billion people are not driving SUVs or flying around the globe. They are fighting to provide the basic needs for their families.
A study was made to identify the most effective individual actions that to mitigate climate change in developed countries:
It is interesting to see that the usual initiatives promoted by the media such as replacing conventional light bulbs with LEDs, do not appear in this study as top 4 high-impact action. More surprisingly, the controversial action of having “one fewer child” has by far the largest impact on an individual’s carbon footprint.
It is important to add that the inequality of emissions also affects high-impact actions. One fewer child from a developed country would reduce emissions by 58.6 tCO2, while one fewer child from India would only reduce emissions by 2.7 tCO2, almost the same as living car-free in Europe. This corroborates the fact that even a higher population growth from the poorest countries would not add much to global emissions due to their lower standards of living.
The list above with the 4 most effective individual actions to mitigate climate change is a good start. However, we are missing the emission of personal investments and how they relate to the emissions of an individual. In the next section, we will investigate the individual’s portfolio carbon footprint.
Your Portfolio Carbon Footprint
A portfolio carbon footprint can be defined as the investor’s overall share of carbon equivalent emissions in their investment portfolio. For example, when acquiring stocks, ETFs, or green bonds, investors should be held accountable for their share of emissions being generated (or being avoided) by the company during the time they are invested.
The investment sector uses the Weighted Average Carbon Intensity as a metric to assess the carbon intensity of a portfolio. According to MSCI, weighted average carbon intensity is defined as the sum of Scope 1 and Scope 2 emissions divided by USD million in sales for each company in the portfolio. See the example below:
Weighted Average Carbon Intensity is useful when comparing ETF funds using the MSCI ESG Ratings tool. However, it is not easy to find it for companies. For individual stocks it is better to look at the company’s sustainability report and search for the emissions (Scope 1+2) in the respective year and divide it by the company’s annual revenues/sales.
We have previously used MSCI ESG Rating tool to identify The Most Sustainable ESG ETF from iShares
Inspired by a study from CoPower in Canada, and to demonstrate how portfolio emissions work in practice, we have calculated the carbon footprint for 3 single-asset investment portfolios of different sizes. In the example we use the extremely popular ETF iShares Core S&P 500 (IVV):
- $10,000 invested in IVV
- $100,000 invested in IVV
- $1 million invested in IVV
Below we compare the equivalent portfolio carbon footprint, or carbon emissions resulting from holding that portfolio for one year, with the 4 high-impact footprint actions presented before:
If you have only $10,000 invested in IVV, that is likely to represent a small share of your carbon footprint (4% for USA citizens or 11% for Danes). However, portfolios of $100,000 start to have a considerable impact on an investor’s carbon footprint. $100,000 invested in IVV can increase the carbon footprint of North Americans by 44%!
Millionaire investors need to be even more careful with their investments. $1m invested in IVV for one year has a carbon footprint of 65.5 tCO2e, which is larger than having one additional child.
To demonstrate how the decisions of sustainable investors are critical to their portfolio carbon footprint, we have calculated the carbon footprint of 3 single-asset portfolios (for simplicity):
- a low carbon ETF: iShares MSCI ACWI Low Carbon Target ETF (CRBN)
- a popular ETF: iShares Core S&P 500 ETF (IVV)
- a traditional oil and gas company: Exxon Mobil (XOM)
For $100,000 invested, the low carbon single-asset portfolio would have a carbon footprint 50-60% lower than the benchmark (IVV), representing only 2.8 tCO2e per year. However, a single-asset portfolio with $100,000 invested in Exxon would result in a carbon footprint of 15.8 tCO2e, or 158 tCO2 for a $1 million portfolio.
Notice that those results are based on GHG emissions from Scope 1 and 2 only. When using Scope 3 estimates from the Carbon Disclosure Project, the carbon footprint of an Exxon-portfolio is 10.7 times higher, independent of the amount invested.
Consequences of Divestment
Divesting from fossil fuel companies can have a huge impact, significantly reducing investors’ portfolio carbon footprint. In fact, if your priority as an individual is to reduce your impact on the environment, your investment portfolio is the most effective place to start.
Nevertheless, we should be aware that when one single small investor divests from an oil ‘supermajor’ nothing happens to that company. Shares will be sold in the market to other investors and the company will continue with its normal operations. Overall emissions will remain the same, only accountability will be transferred.
When the divestment action expands from one single investor to the community, to universities, to pension funds, to sovereign wealth fund, and to other institutions, that is when divestment will start gaining volume and the oil super-majors will start considering adapting their long-term strategies.
Conclusion
Tackling climate change is a task of gigantic proportions and extremely critical for the future lives on Earth. It requires a combined effort from companies, governments, and individuals.
However, the numbers are clear about who are the ones with the largest footprint and who should take responsibility: the large powerful nations (China, USA, EU), the richest 10%, and the large fossil fuel producers. Unfortunately, those are also the ones with a history of acting only in their own self-interest.
From an individual investor’s perspective, the portfolio carbon footprint can be the single most important driver of GHG emissions. This gives investors even more responsibility to make the right decisions when selecting ETFs or stocks and allocating their lifelong savings.
Not investment advice: The information provided on this website is intended for general information purposes only and does not constitute investment advice, financial advice, trading advice, or any other sort of advice. You should conduct your due diligence and, if necessary, consult a qualified independent financial advisor before making any investment decision.
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