Portfolio Carbon Footprint Reporting
Within our ESG scoring model we have a comprehensive criterion that funds must meet before being considered for inclusion in our sustainable portfolio. The portfolio-weighted carbon footprint measure is another tool which our investment team uses in making such decisions. This approach is focused on measuring the environmental impact of our investments along with the associated climate change risks embedded within them. We believe an appropriate measure is greenhouse gas emissions as a proportion of total investment. This document is intended to outline the methodology we use at Binary Capital to do so.
We aim to provide our investment teams and clients with an easily understandable emissions measure which can be easily explained, compared and associated with everyday processes. The measure allows us to keep track of funds’ performance over time, record this data, and compare against universal benchmarks.
A problem we encountered during the data collection stage was the significant proportion of companies that do not disclose their emissions data (direct or indirect). The main-carbon data providers usually rely on companies’ disclosures. Some companies use proprietary estimation methods to fill this gap or, they use third party companies as the source of data. We do not want to skew results based on estimations and therefore only use fully disclosed recorded data from Bloomberg.
2.2 Calculation process
We take our direction from the GHG Protocol. We seek to measure carbon dioxide (CO2) and a list of equivalents which, for credibility they are covered by the Kyoto protocol: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2o), hydrofluorocarbons (HFCs), perfluorocarbons (PCFs), Sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3).
We aim to measure GHGs across the operational boundaries of the companies considering a range of emissions associated both directly and indirectly with the operations of the company. GHGs are defined by a range of Scopes 1, 2 and 3.
Scope 1 – Direct emissions that “occur from sources that are owned or controlled by the company like emissions from combustion in owned or controlled boilers, furnaces, vehicles, emissions from chemical production in owned or controlled process equipment.”
Scope 2 – Indirect emissions those linked to the generation of purchased electricity consumed by the company. Emissions are created during the production of the energy and eventually used by the organization.
Scope 3 – All other indirect emissions produced by the organization, occurring from the sources they do not own or control like those linked to extraction and production of purchased materials; transportation of purchased fuels; and use of sold products and services. Usually a large share of the carbon footprint but are difficult to measure.
Bloomberg generates the data based on the company’s disclosures. At Binary Capital we base our calculation on the availability and reliability of the data. Therefore, we create the variable total GHG emissions to include Scope 1 & 2 only to calculate companies’ carbon intensities and Portfolios’ carbon footprints. We do not include Scope 3 in our calculation because we do not consider the quality of the data provided as being good enough yet to provide a reliable measure.
We have constructed a method to calculate the individual carbon footprints of the holdings within our investable funds and an overall sum of the companies’ carbon emissions for the portfolios and benchmarks. These are weighted sums, taking into consideration the individual allocations of companies, their emissions within the portfolio and scaled to the Enterprise Value (EV) of each company. Companies’ CO2e emissions are summed and asset weighted by EV and the companies’ weights in the portfolios. The footprint is expressed in tons of CO2e per million £’s of EV. The formula is as follows:
Wptf,i: Portfolio weight in company i
Total CO2e Emissions i: sum of Scope 1 & 2 CO2e emissions expressed in tons for company i
Enterprise Value i: Enterprise Value for company i expressed in (£mlns)
We use Enterprise value as a scaling factor. The reason for this is as investment managers we take an ownership position of the companies we invest in. Scaling the carbon emissions allows us to understand the relative carbon footprints within our portfolios rather than an absolute figure. It is important to note that there is no one standard measure to scale for a given portfolios carbon footprint. We believe Enterprise value is an all-encompassing measure, not directly related to an individual operational activity within the firm providing a relative carbon footprint value.
Double counting can be thought of an issue; however, we do not find this significant in our carbon footprint calculation. As mentioned, the purpose of this exercise is to be able to compare funds with funds and benchmarks on an equal scale. The method used is the same across the board without any deviation from this, and we do not seek to calculate the overall contribution of funds on a total contribution level but for comparison purposes. For us, it is another tool we can utilize in the portfolio construction process for investment teams and portfolio managers providing an overview of the emissions linked to investments.
The benchmark we have used is an ETF that tracks the MSCI ACWI World Index:
SPDR MSCI ACWI UCITS ETF (ACWD LN)
3.Summary, Limitations & Future Improvements
We believe this method provides us and our clients with a ‘good’ measure of greenhouse gas emissions produced as a value of our investments. It provides a figure for our investment team and our clients to facilitate a comparison across funds and pre-determined benchmarks. This informs our portfolio managers so that carbon emissions can be integrated into the portfolio construction process. In addition, is provides an indication of funds and companies that need to actively do more to improve their total C02e.
However, we understand that this measure cannot offer a complete representation as it does not yet capture all aspects associated with climate risk. We aim to improve this measure as data disclosures become more available. As scope 3 measurements become significantly more reliable, we will start to include them into our total CO2e calculation. Scope 3 emissions can account for more than 80% of total CO2e for companies within the oil & gas industry and the auto industry where their main climate impact comes from the product they sell (over the products lifecycle). This can create a significant sector bias in carbon footprint calculation, and we seek to accommodate these values in the future.
In the future we aim to include the Fixed Income proportion of our portfolios in the calculation. This will provide us with a more inclusive measurement to consider a company’s debt and again, we will use Enterprise Value as a scaling factor. Our methods are currently being developed and we aim to have Fixed Income integrated into our calculations in the near future.
Our carbon footprint measure can be used as an additional tool to aid our ESG and sustainable portfolio construction process. It is not a tool we use a single measure to decide if a fund can be included in our portfolios.