Investors play an important role in combatting climate change. However, this role is often not what it is widely believed to be. Fact is that investors do not normally produce or manufacture anything. Even so, investors wield influence in several ways and their actions have an impact.
Over the past few years, responsible investing has taken long strides. A key factor in this transition is the public, extensive and global realisation of the importance of climate change and the actions to mitigate it. From the investors’ point of view, the development of the indicators measuring the carbon footprint has meant a major leap forward. Now we more or less know the size of each investor’s footprint.
Measuring the carbon footprint
Investors have actively called for greater transparency in reporting on carbon footprints. Carbon Disclosure Project was launched twenty years ago. Investors wanted to know the carbon footprints of companies. This piece of information would be invaluable if regulation were tightened, and prices went up. However, in this case the investors had no ulterior motives because the benefits of transparency would be available to all. Since then, things have changed drastically. Now all major listed companies report extensively on their carbon footprints.
For investors, the carbon footprint is an apt theme, as it combines financial thinking with responsibility. Investors love things that can be measured. Typically, this measurability has existed in the two-dimensional world of returns and risk indicators illustrating fluctuations in the value of the portfolio. Now that we have access to numeric data on the carbon footprint, the carbon indicators are introducing a third dimension to this equation.
However, investors are unable to control the footprints of companies directly. But as executives meet investors on a regular basis, they tend to listen to investors who may then indirectly contribute to sound and rational development.
Having an impact on the carbon footprint
An investor can influence the carbon footprint of its own portfolio in a number of ways. As far investments in stocks and corporate loans are concerned, the investor’s carbon footprint is pure arithmetic. You simply check the figures for carbon intensity or total carbon footprint to determine how the portfolio is performing in this respect. This is something that can be monitored in real time.
However, the set of indicators used for measuring the carbon footprint include a number of details eclipsed by the simple and clear system of measurement. Carbon intensity is a number specific to each individual company that typically measures CO2 emissions relative to turnover weighted by the market values of the investments. Of these numbers, only one is good, and that is the CO2 number. The two other numbers provide information unrelated to the efforts to contain the global climate change.
The investor can influence the size of the carbon footprint easily. If it were only measured in terms of carbon intensity, which would only include direct emissions and emissions from the energy consumed, i.e., scope 1 and scope 2 figures, it would be easy for investors to reduce the levels, for example by investing in Japan or Sweden. In these countries, the emissions are about one third of the emissions represented by an average investment portfolio. However, investments in Japanese and Swedish companies would only serve to distort the return and risk levels of portfolios.
Achieving carbon neutrality
As far as future developments are concerned, a key role will be played by the objectives for carbon neutrality established by corporations and governments as well as the measures adopted to achieve them. If implemented, and if a sizeable percentage of the companies and countries achieve these objectives by 2035-2050, investors will automatically achieve their carbon neutrality goals.
Hence, the key question is whether we can rely on the declarations and objectives. The most important outcome of this year’s COP26 conference is that greater efforts will be made next year to monitor the attainment of the targets and milestones. This will also contribute to the materialisation of investors’ carbon neutrality visions. At the same time, investors can affect their own carbon neutrality and its attainment through portfolio weightings.
”You get what you measure”
Climate change and the carbon footprint lie at the heart of the strategies and deliberations that investors engage in. These themes have come to occupy this central position because both individuals and decision-makers in companies and governments take the matters seriously. As they have and will continue to have financial implications, investors take a keen interest in these themes.
Climate change and the carbon footprint go beyond mere risk management because future regulation and price changes will have financial consequences. The indicators used by investors are important because they affect operations. Hence, it is highly desirable that both the indicators and the favourable developments push things in the same direction. Carbon intensity remains a useful tool for investors, but in the future the set of indicators will become more varied and yield more accurate information.
The writer is VER's CEO Timo Löyttyniemi.
