Environmental organizations like Greenpeace Corp. consider carbon offsetting greenwashing, a criticism of ESG in general, because companies are not actively reducing emissions.J.P. Moczulski/The Canadian Press
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Climate change is on the minds of clients more than ever, and advisors have a growing assortment of strategies to help them reduce the impact of their portfolios on the environment.
As environmental, social and governance (ESG) strategies have gained ground over the past several years, investors and advisors can take their efforts a step further by measuring their portfolios’ carbon emissions.
They can even offset those footprints by purchasing carbon credits to make portfolios carbon-neutral.
Yet, the notion of making portfolios “net-zero” has yet to catch fire even among environmentally conscious investors.
“There aren’t too many investors asking for a carbon-neutral portfolio right now,” says Mike Thiessen, chief sustainability officer and partner at Genus Capital Management Inc. in Vancouver.
But the potential is there given the growing demand for ESG strategies. Investments in ESG-focused funds globally grew by a record high of US$649-billion in assets under management (AUM) in 2021, according to data from Refinitiv Lipper. That’s up from a growth of US$542-billion in 2020 and US$285-billion in 2019.
Even though carbon footprinting and credits are not yet household terms for most investors, they’re likely to increase in appeal in the coming years as awareness grows, Mr. Thiessen adds.
Genus already calculates its footprint and purchases credits to offset emissions from activities like business travel.
The firm also provides footprint calculations for client portfolios on request, but it does not offset emissions from its portfolios actively in part due to a lack of client demand, Mr. Thiessen says.
Despite being largely under-the-radar as an investment concern, carbon footprinting and credit offset markets have grown more popular among corporations in the past decade and with the establishment of regulated cap-and-trade markets like those in California, he says.
More recently, investment products have emerged including two Canadian-listed exchange-traded funds (ETFs) from Evolve Funds.
“It’s going to take a little bit of time,” says Raj Lala, chief executive officer (CEO) of Evolve, about the demand for the ETFs launched last May.
Evolve S&P/TSX 60 CleanBeta Fund SIXT-T and Evolve S&P 500 CleanBeta Fund FIVE-T put a new twist on ESG, he adds.
Rather than excluding companies with poor ESG scores or engaging in shareholder action to push companies toward climate action, Evolve calculates the carbon emissions of firms held on the indexes and then purchases offsetting credits to neutralize that footprint.
Evolve has partnered with S&P Global Trucost, which provides carbon footprint reporting for more than 15,000 companies, to calculate its funds’ emission costs.
“Trucost will deliver a carbon calculation based on $1-million invested,” Mr. Lala says. “So, for example, $1-million invested in the S&P 500 results in an attributable 52 metric tonnes of carbon emissions.”
In turn, Evolve purchases carbon credits to offset those emissions.
“It’s not that expensive to decarbonize the S&P 500,” he says.
The costs to do so are 12 basis points for the S&P 500 CleanBeta Fund and 17 basis points for the S&P/TSX 60 CleanBeta Fund, which are added to the ETFs’ management expenses.
Mr. Lala says demand for the ETFs has not taken off, but he believes it will get a boost as more publicly-traded companies, governments, and large institutional investors buy and sell carbon credits on voluntary markets or mandatory compliance markets like the California Carbon Credit Market.
Firms like Microsoft Corp. and Delta Airlines Inc. are already investing substantially in carbon offsets because “they’re kind of the low hanging fruit for companies around the world to start really taking an active role in helping fight climate change,” says Justin Cochrane, CEO of Carbon Streaming Corp. NETZ-NE.
The Toronto company launched two years ago with a business model of investing in carbon offset projects to earn credits to sell on voluntary markets like the Nature Based Carbon Offset market.
“We might, for example, invest $10-million in a reforestation project,” which then produces one million credits annually that can be sold to individuals, companies, and governments to offset emissions, he says.
Mr. Cochrane adds the company’s share price has “been on a nice run” recently, driven by rising carbon credit prices in voluntary markets, noting they have become a tradable commodity.
Still, environmental organizations like Greenpeace Corp. consider offsetting to be greenwashing because companies are not reducing emissions actively.
Mr. Cochrane argues that carbon credits have a positive impact not only because they lead to more investment in projects removing carbon from the atmosphere or producing renewable energy, but they also put a price on emissions that will rise to a point of pushing corporations to reduce it.
“It’s likely the price of a [carbon] credit has to be north of $100 before the industry will move away from high-polluting sources of power and technologies and actually invest in technology to reduce their footprint,” he says.
Awareness of carbon footprints and credits is also gaining ground among investors and the investment industry, overall, given that demand for related services is increasing significantly. For example, MSCI Inc. has seen its client base for climate tools, including footprinting, double last year from 2020.
“Once investors understand what the emissions footprint is in their portfolio, they can make adjustments … figuring out which companies are the right ones to engage with [to reduce emissions],” says Chris Cote, vice-president of ESG research at MSCI in Cambridge, Mass.
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