By Redpoint Investment Management
"This one trend, climate change, affects all trends."
Barack Obama, UN Climate Change Conference, Paris, 2015
Redpoint Investment Management Pty Ltd, equities fund manager, believes one of the greatest challenges facing investors today is the impact of climate change. Since the first Intergovernmental Panel on Climate Change (IPCC) Assessment report in 1990 the issue of greenhouse gas emissions has evolved from a government reporting matter to recognition of climate change as a key investment risk.
The investment challenge of climate change is complex. The current focus is on exposure to 'stranded assets' (more about this below). But also the exposure of businesses to greenhouse gas emissions in their processes and supply chains.
The concept of a 'stranded asset' is not new. Think of the transition from fixed line phones to mobiles and from cellulose film to digital cameras. Currently, companies that own fossil fuel deposits may face a similar demise based on either government imposed extraction quotas or competitive and technological substitution by companies that utilise such fuels.
Being able to identify companies with assets that could potentially be stranded by policy or competitive forces of climate change is non-trivial, but reasonably straightforward. Coal mines and mine-owning utilities are examples.
But to more effectively reduce a portfolio's exposure to carbon risk requires deeper analysis.
Greenhouse gas emissions of companies are typically characterised as:1
Companies have to report on data from Scope 1 and Scope 2, to comply with the greenhouse gas protocol corporate accounting standard.2 Scope 3 reporting is optional. Scope 1 and Scope 2 data is often used to calculate carbon intensity.
UK based Trucost Plc are experts in environmental data capture and analysis. They've been assessing the economic impact of the dependence that companies have on natural resources for over a decade. Trucost's preferred measure includes Scope 3 emissions that arise from direct service providers within a company's supply chain. This allows for more accurate comparisons between companies with similar activities underpinning their outputs, but with different degrees of outsourcing. It is supported by a mix of modelling and data collection to determine Scopes 1, 2 & 3 where the data is not directly reported by the companies themselves.
TABLE 1: TNT vs Expeditors
|Total (Scope 1 and Scope 2)||1,316,268||50,920|
|Scope 1 & 2 carbon intensity||153||8|
|Trucost carbon intensity||166||886|
Source: Redpoint Investment Management and Trucost. Data from 2014. Carbon intensity: calculated for each company as metric tonnes of greenhouse gas emissions (in carbon dioxide equivalents – CO2e) divided by company revenue in millions of US dollars.
The differences between carbon intensity estimates is highlighted by comparing two similar logistics companies: delivery specialists TNT and Expeditors International.
Table 1 highlights the quite different conclusions that can be drawn based on the choice of intensity measure. Using only Scope 1 and Scope 2 data, Expeditors appears to have significantly lower carbon intensity than TNT. Trucost's measure, which includes the bulk of Scope 3 emissions, reveals Expeditors having a vastly higher carbon intensity. This impact is due to Expeditors' business model: being a non-asset global logistics provider that outsources its transportation needs.
This depth of analysis and insight will become more important for investors as they seek to understand their investments in the context of climate risk. Consideration of stranded assets is a valuable start but insights into the carbon intensity of all companies will assist innovative investors to more effectively account for this important social and financial risk; and improve risk and return outcomes.
1. The latest carbon footprint data is sourced from Trucost, which maintains the world's largest database of greenhouse gas disclosures. See http://www.trucost.com/ for further details.
2. The Greenhouse Gas (GHG) Protocol, developed by World Resources Institute (WRI) and World Business Council on Sustainable Development (WBCSD), sets the global standard for how to measure, manage, and report greenhouse gas emissions.
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