Trucost News / 19 Jan 2011

High cost of carbon to investors

Trucost worked with WWF-Canada and Mercer to assess the carbon exposure of Canadian institutional investment portfolios.

Today, WWF-Canada released a ground-breaking report highlighting climate change as a new risk for institutional investors, and providing insights in carbon risk assessment of an investment portfolio.

The report Carbon Counts: Assessing the Carbon Exposure of Canadian Institutional Investment Portfolios was prepared for WWF-Canada by Mercer and Trucost to identify the carbon exposure of Canadian institutional pooled investment products.

As climate change continues to affect societies, governments and businesses around the world, investors are increasingly recognizing the likelihood of profound regulatory and social change driven by climate change concerns. The report provides a quantitative assessment of the carbon impact of Canadian institutional investors’ portfolios by analyzing the greenhouse gas emissions and associated risks generated by the companies held in these institutional portfolios.

Josh Laughren, Director of Climate and Energy for WWF-Canada said: “By understanding and managing their carbon exposure, investors can better protect their investments and help fight climate change at the same time.This is an issue that will affect every investment portfolio, and recognizing potential impacts will be increasingly important.”

The study found that the S&P/TSX Index has the third-largest carbon footprint among major global indices, measured by carbon emissions per USD 1 million sales. Only the Indian and Emerging Markets global indices have larger footprints. These findings are consistent with resource-based economies that rely heavily on sectors such as oil and gas. The Canadian pooled funds invested USD3.7 billion in 20 energy companies operating in the carbon-rich oil sands operations in Alberta as of end of 2009.

The carbon footprints of the 181 funds analysed vary widely, due to both stock selections and sector allocation decisions. Funds with larger carbon footprints are likely more exposed to greenhouse gas-related investment risks, including regulatory, litigation, market and reputational risks. The report provides recommendations on how asset owners and investment managers can take action to reduce the carbon exposure of their investments.

Elisabeth Bourqui, Head of Responsible Investment Canada for Mercer said: “Climate change and assessing carbon exposure are becoming important issues for institutional investors – both in terms of potential risk and opportunity.”

Mercer conducted its analysis using carbon footprint data from environmental data provider Trucost Plc. This report also includes the carbon risk assessment of the equity portfolio of four Canadian institutional investors – the Toronto Atmospheric Fund (TAF), Community Foundation of Ottawa (CFO), a public pension plan, and Bâtirente, a workers’ union fund – as case studies.

The carbon footprint of the TAF portfolio analyzed was significantly lower than the benchmark, primarily due over-weighting in less carbon-intensive sectors.

Julia Langer, Executive Director of the TAF, an agency of the City of Toronto mandated to advance solutions to climate change and air pollution, indicates that their “investment strategy is premised on the belief that carbon risk will ultimately affect performance so and as a prudent investor our objective is to minimize carbon and maximize return.”

Similarly, CFO’s carbon footprint was also lower than the benchmark’s due to sector selection.

In CFO’s words, “The impact of stock selection is interesting. While we would have expected a higher than benchmark footprint due to our overweight in energy it is diminished by the fact that our two largest holdings in energy have lower than benchmark carbon footprints. The opposite is true of our selection in materials where we are significantly underweight by sector in materials, but our holdings result in very high footprints”.

They also added that “This information is part of our learning process and we will plan on continuing to monitor our carbon footprint”.

The public pension fund had a lower carbon footprint as well, but its footprint was equal to the benchmark when the sector allocation effect was removed.

Bâtirente’s footprint was found to be higher than the benchmark due to investment in high carbon impact sectors, demonstrating the impact of stock selection on the portfolio’s carbon footprint.

Francois Meloche, Extra-financial risks Manager at Bâtirente said that “they will engage in a discussion with the portfolio manager and see if the carbon footprint analysis should be updated every year and how much it will cost”.

Trucost Senior Vice-President Cary Krosinsky said: “Investors can help protect the value of investments by asking fund managers to measure and manage carbon risks from holdings.”

“Climate change is reshaping the investment landscape. We hope this report can help institutional investors reduce their carbon exposure, in advance of inevitable changes in regulations and consumer demand,” concluded Josh Laughren.

Find out more

Carbon Counts: Assessing the Carbon Exposure of Canadian Institutional Investment Portfolios



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