Tracking the Carbon Intensity of Your Portfolio

Qayyum Rajan
August 8, 2020
Table of contents

Of all the environmental issues within the fast growing realm of ESG, carbon emission reductions are the most recognized, and measured. As a result, more investors are tracking the carbon intensity of their portfolios and are using the carbon tracking data to help with their investment decision-making process. Read on to learn more about how this works and why it matters. 

Why carbon emission reductions matter

The climate science is now clear. If the world is to avoid the potentially catastrophic effects of a rapidly changing climate, the world must transition to a net zero carbon emissions economy by 2050. As shown below, the range of global climate outcomes by 2050 is wide and depends on the action the world takes now. 


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Nearly thirty years may sound like a long time to achieve this goal, but immense systematic change is needed across all sectors. And given initial emissions reductions are generally easier to abate than later ones, most experts believe a fifty per cent reduction in global carbon emissions must be achieved over the next ten years if the 2050 net zero goal is to be achieved. 


How to track the carbon intensity of your portfolio

So how do investors track their portfolio carbon emissions in a meaningful way?

The most common way to track carbon intensity is to calculate carbon emissions as a percentage of each company’s revenue, and to watch how it tracks over time. Most companies have committed to longer term carbon emission reduction targets which are also useful to compare with their annual carbon emission performance. 

As shown below, this carbon intensity measure (carbon emissions per $1 million of revenue) presents a very different across the various sectors of the economy. Energy, utilities and materials are particularly “carbon heavy” and thus warrant close attention from investors, while healthcare and communications are low carbon intensity sectors. 

You can then compare this across companies, or aggregate it to determine your portfolios Carbon Intensity.

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Why a low carbon intensity portfolio is well positioned long term

There are two clear reasons why low carbon intensity portfolios are particularly well positioned looking forward. 

Firstly, it’s noteworthy that the two most carbon intense sectors in the market are energy and utilities both of which are still heavily exposed to traditional energy sources such as coal, oil and gas. The energy sector has been dramatically underperforming for many years as shown below for the simple reason renewable energy is taking global market share from carbon heavy energy sources.

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Source: CleanTechnica

This transition towards low carbon energy sources is not only driven by investors’ focus upon taking climate change action. It’s also being driven by economics. As shown below, wind and solar are now producing significantly cheaper electricity than coal after many years of investment. 


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So the key point here is that carbon emissions have been a key determinant of stock performance in the energy sector for many years, and are likely to remain important looking forward. It’s a sector in which ESG data is of significant importance. 

The second noteworthy point is that this same theme is playing out across the global economy. Companies which are reducing their carbon emissions fastest also tend to be reducing their costs fastest, as well as embracing the business opportunities created by climate change and the transition towards a low carbon economy. Climate change is both an opportunity and a risk, but it’s clear that the companies which embrace the opportunity are benefiting the most. So once again, one of the best data points to follow for investors is carbon intensity at a company and portfolio level. 

It’s clear that as the transition towards a low carbon world accelerates, portfolios which are exposed to low carbon intensity stocks are generally exposed to high quality companies which are positioned to benefit from this transition rather than suffer in the face of the changes. 


Conclusion


Tracking portfolio carbon intensity has never been more important. And it’s also never been easier thanks to ESG data providers like ESG Analytics who are providing the data in an easily accessible way. ESG focused investors are well positioned to use ESG Analytics’ carbon intensity data to optimize the long term outlook for their portfolios.


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