Tracking carbon emissions from all sources is complex, and it is only one part of sustainability.Ilmar Idiyatullin
Many equity investors address their climate concerns by filling their portfolios with companies that are lowering their carbon emissions.
Using that decision-making strategy can help people satisfy their values and financial goals. But it isn’t as straightforward as it seems, and it can leave out other important aspects of the sustainable investing framework.
“I would not advise that as an approach, as it is a massive oversimplification of what ESG (environmental, social and governance) is trying to do,” says Jamie Bonham, director of corporate engagement at NEI Investments in Vancouver.
Numerous factors can support or detract from a company’s sustainability profile. How they fare around emissions and climate change is just one. Even looking at a firm’s or fund’s carbon footprint is rife with hurdles, as many players may be involved with the production of any good or service. Nailing down a single company’s carbon emissions is complicated.
Carbon emissions, also called greenhouse gas emissions, are broken down into three categories. As the World Economic Forum explains, scope one refers to the direct emissions produced by the equipment or part of the production process a company controls. They’re often the easiest to track and report.
Scope two are the indirect emissions created by the production of the energy that an organization buys. Scope three are also indirect emissions produced by suppliers and by customers when they use a company’s products. Those are substantial and far trickier for companies to measure.
“How do you get to report on that? How do they even give you, as an investor, that information that makes sense? Information has to be accurate and verifiable, and in this case that’s very difficult,” says Rumina Dhalla, an associate professor of organizational behaviour at the University of Guelph.
She questions the wisdom of only looking at carbon emissions because investors could miss out on an organization’s “changing behaviours” overall, which could offer greater insight into what it is as a company.
“It doesn’t tell you anything about their social dimension. It doesn’t tell you what their human rights records are. It doesn’t tell you how they treat their workers. It doesn’t tell you what they do for the community. It doesn’t tell you anything about product safety issues – none of that happens,” Ms. Dhalla says.
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Another challenge around tracking emissions data in isolation is that some products that sound like good environmental investments actually have a high carbon footprint, says James Tansey, an associate professor at UBC Sauder School of Business in Vancouver.
“Let’s say you’re trying to produce the greenest apparel in the world. If you’re very good at that, you should get more business and your emissions might very well grow,” he says.
While the product is greener, emissions are higher. In theory, the intensity of those emissions per dollar or metre of fabric could go down too. There are too many variables to just proclaim “the companies with the lowest emissions are better,” Mr. Tansey says.
He encourages climate-conscious investors to dig deeper. That can include looking at annual reports and statements, overall carbon disclosure projects, and what kinds of commitments companies are signing up for (like the science based targets initiative or net-zero pledges). All of that can generate more insight into a company’s activities and output.
“A company that’s working really hard on its emissions reductions is almost certainly going to have a comprehensive environmental management regime as well,” Mr. Tansey says. “It’s not like they’re going to be reducing emissions but still polluting waterways or dumping pots of waste. It tends to all go in a bundle.”
There’s no one right way to invest, especially when it comes to upholding one’s values and trying to make a positive impact. But Mr. Bonham remains concerned that investors will cut themselves off from significant ESG metrics, as many of these elements are intertwined.
“If you don’t have a lens beyond that simple carbon metric, you’re going to miss out on what are probably some pretty fundamental ESG concerns that you would otherwise profess to have,” he says.