According to the Bloomberg Carbon Footprint tracker, the representative global sustainable equity strategy charted below has a much smaller carbon footprint than a pound invested in the MSCI AC World index (the benchmark index for most global equity strategies). But being honest cynics and sustainability truth seekers, we always take such statistics with a pinch of salt and ask tough questions like.. how and what is this measuring exactly?

It’s unreliable

Firstly, the data is largely company reported data with weak independent verification. Secondly, a large percentage of companies (17% of the index and over 70% of the companies in our strategy) don’t report enough data and therefore the figures are just estimates based on a very broad sector average. Sector weighting has a very big impact on the data with utilities, materials and energy being very large contributors to the overall index emissions.

It’s complicated

The carbon that is being measured is the ‘gross’ carbon emissions. This is a simple measure of how much CO2 a company produces when making the products and services that they sell.  For example, a typical steel producing company uses a lot of energy and thus CO2 during its manufacturing process. By way of contrast, a software developer uses much less carbon to produce code. But coders still need an office made in part from steel.  Super Gross Carbon Emissions (a new term coined by me on Wednesday) is perhaps a more all-encompassing way of looking at emissions because it includes how much energy is used in the entire supply chain prior to the steel manufacturing or software coding. Steel is made of materials that are typically mined in a carbon intensive process – although there are innovators like Steel Dynamics, which uses mostly recycled scrap. To judge how a company performs on this basis requires a laser focus on sustainable practices relative to equivalent comparisons.

It takes a lot of oil to produce oil. The above chart shows the tonnes of GHG produced per 1000 tonnes of oil produced. Yes, it costs 271 tonnes of GHG per 1000 tonnes of oil produced in North America (before it is burned to power a car).

It’s nuanced

But what about all the carbon that these products might save (or create) once they have been produced? For example, steel could be used to build a wind turbine. This is called the ‘net carbon emissions’ and this is where product impact really comes into play. A car manufacturer may have great supply chain and manufacturing practices, but if it’s main product is a three tonne V8 Pick-up truck, it isn’t solving many problems. Super Net Emissions (I coined this term on Wednesday too) extends the logic further and thinks about the Positive second order impact of the products being produced. For example, how much CO2 will be saved as a result of BMW using Ansys’ simulation software to minimise the aerodynamic drag of the new 7 series? And who should be credited, BMW or Ansys?

So are we carbon light?

The Bloomberg Carbon tracker only tells part of a story. Whilst companies still need capital intensive industries in their supply chain, our bottom up focus on practices leads us to prefer capital light companies, which are more ‘virtualised’ and more ‘circular’ in their supply chains. Even more preferable are companies whose products reduce the CO2 of other companies’ supply chains (for example, building insulation, or engineering solutions providers). Finally, if we think about it from a Net (and Super Net) basis, we look for positive compounding second order impacts that are very difficult to measure.

So what can we do as sustainable investors? Unfortunately there isn’t an easy answer.  We believe that we must endeavour to assess the positive and negative impacts of the products and practices of every company we consider for investment. This takes hard work and diligence, but we believe it is worth the effort from both an impact and return perspective.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for co-managing global equities portfolios. He joined us in 2014 from SWIP, where he was investment director in global equities. In addition Craig also had analysis responsibilities for the tech, energy and utility sectors. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors, a member of the global environmental equity team. Craig has a 1st Class honours degree in Building Surveying, an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 16 years’ industry experience*. (*As at 28 February 2018.)

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