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Carbon Conscious Portfolio Management

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Info article: 

Portfolio and sustainability management

May 12th, 2024

Organisations working towards carbon neutrality are becoming more aware of the importance of carbon conscious investing, recognising the societal, environmental and possibly even financial gains to investing consciously. At the heart of carbon conscious management, businesses should be looking to streamline portfolios in only including investments that align with internal sustainability goals and that positively influence the investor organisation’s carbon footprint.

Introduction to ESG Investing

In short, carbon conscious investing is the consideration of environmental, societal and governance (ESG) health of a potential investment. This can range from and can also be influenced by the investor’s values. 

Carbon conscious portfolio management applies to the ESG consideration of a business investment portfolio as a whole, including every investment included in the wider portfolio. 

Ethics underpin much of ESG investing – to ensure your consciously managing the carbon element of your portfolio, seek out investments that mirror your alignment with carbon emission reduction targets.

A key element of carbon conscious investing falls under the ‘environmental’ category of ESG investing. Working out how dedicated your potential investment is to reducing carbon emissions or carbon offset projects might make or break whether you decide to invest. Remember, when your carbon footprint is calculated it takes into account your business’ suppliers and investments, so transparency is key. We’ll explain more about how to accurately calculate an investment’s carbon footprint in the following section of this article.

Evaluating Carbon Footprint in Investment Portfolios

For carbon conscious investment to be efficient, it relies on accurate data recording of the potential investment company’s carbon footprint. The public sector tend to do this well, however privately owned companies often fall short. A corporate carbon footprint is made up of the carbon emissions generated during business operations such as manufacturing, heating and lighting. See the section in this article titled Carbon footprint mapping to discover tools to help you map your carbon footprint accurately.

Strategies for Carbon Conscious Portfolio Management

Carbon conscious portfolio management takes into consideration the ESG values of another business or project your company might be looking to invest in. One of the key elements to successful carbon conscious portfolio management is that the investments made align with the investor’s personal values which fall broadly into the following criteria. For carbon conscious investing we would predominantly look at an investment’s environmental values, but there are elements in the remaining two categories that could influence your carbon footprint:

Environmental 

Nature-based factors play a big role in a business’ environmental values, so when considering investing in a potential organisation for your business’ portfolio you might want to examine how they conserve resources or promote biodiversity within their organisation. Crucially, the potential investment’s approach to reducing or offsetting carbon emissions should play a role in whether you decide to invest in a company, or not. Carbon offsetting is the trading of offset carbon from one ‘selling’ company to a ‘purchasing’ in order to bring down their carbon footprint. This deemed to be considering your green portfolio.

Societal 

Societal goals tend to be concerned with making the world a better place to live for humans. If your business prioritises the improvement of society, you should look for evidence of how your potential investment has put emphasis on societal progression, primarily how it’s approached concerns like human rights practice, consumer protection and promoting good labour conditions. In relation to carbon reduction, a potential investment could have themselves invested in a carbon offsetting scheme that benefits the local community, particularly in developing countries.

Governance 

Less altruistic, taking into account a potential investment’s governance goals can be hard to quantify on a broad scale. Governance values will likely closely align to your own business’ governance goals and will incorporate elements such as how the company is structured, board selection and input, transparency and salary benchmarking. Generally you’d examine governance to help identify accountability and how a company manages risk, but in the case of carbon conscious investing you’d want to determine how the board approaches issues like carbon emissions reduction and offsetting.

Trends, Tools & Resources for Carbon Conscious Investments

Advanced mapping tool 

Private companies tend to be far behind their public counterparts in terms of disclosing their carbon emissions because they often don’t need to provide as much transparency around carbon emissions as public businesses do. Carbon footprint calculators can go some way to determine this, but mapping tools go one step further. They calculate factors not widely considered, such as holding periods and use peer-mapping models to estimate missing carbon data in a portfolio based on average carbon data within that business’ peer group. This helps to get an accurate reading of a business’ total investment portfolio and move towards carbon conscious investment. For more information on analysing carbon footprint in portfolios, go to the section of this article titled Evaluating Carbon Footprint in Investment Portfolios.

Positive and Negative Screening 

Using blanket screening to filter out investments that don’t align with your carbon goals will make it easier, quicker and simpler to build a carbon conscious portfolio. Positive screening involves selecting potential investments based on broad ESG values that your business holds while negative screening avoids any investments that contribute or invest in that may negatively impact your carbon profile, such as an investment in fossil fuels. 

Using ESG Agencies 

If you don’t feel knowledgeable enough to screen or select investments based on carbon conscious values, you can utilise ESG agencies who categorise potential investments based on ESG performance. 

Measurement Frameworks for Impact 

Environmental impact of a potential investment can be measured using a number of different quantified frameworks to help determine whether to include that investment in your portfolio. Frameworks applicable to environmental concerns include the Sustainable Development Goals (SDGs) and GIIN’s IRIS+ system. 

Impact of Carbon Conscious Investments Management

Consciously managing a carbon portfolio benefits businesses in a number of ways. They can bolster the employment value proposition for potential new hires, attain sustainability goals, potentially reduce sustainability-led penalties and improve a business’s share of voice and brand reception.

Looking for more guidance on your sustainability strategy?