July 03, 2006
Does Trucost Measurement of Corporate Carbon Footprints Reduce Environmental Impacts?
by Bill Baue
Trucost ranks the carbon intensity in UK portfolios, arguing for overweighting companies with lower
carbon footprints to reduce ecological impact while maintaining performance.
Measuring carbon footprints, or the ecological impacts of a given company’s greenhouse gas
(GHG) emissions, is significantly more complicated than measuring your own footprint when buying
shoes. This did not deter UK-based environmental research firm Trucost from devising a methodology for gauging corporate carbon
footprints, which are gaining relevance environmentally due to climate change concerns and
financially due to carbon taxing and regulation. In a recent study, Trucost calculates aggregate corporate
carbon footprints in the 44 largest UK mutual funds and investment trusts. Of the top ten
portfolios with the lowest carbon intensity, seven are socially responsible investing (SRI) funds.
The top two spots go to Scottish Widows portfolios--Environmental
Investor and Ethical Fund, with third place going to Norwich Union Sustainable Future UK Growth Fund. Other SRI funds in the top ten include:
Stewardship Growth Fund, CIS Sustainable Leaders Trust, Henderson
Global Care Income, and Standard Life UK Ethical
To calculate carbon footprints, Trucost compiled corporate and supplier
emissions data on the "Kyoto basket of six" GHGs covered by the almost-global protocol. Labeled
carbon dioxide equivalents (or CO2e), these GHGs include carbon dioxide (CO2), methane (CH4),
nitrous oxide (N20), hydro fluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride
"But of course businesses can be of a very different scale to each other making
comparisons difficult," states the report. "To overcome this, carbon emissions can be compared to
the scale of the business by looking at turnover."
"This allows valid comparison
regardless of the size of different businesses," the report continues, referring to the carbon
footprint equation of CO2e tonnes as the numerator divided by portfolio market value in millions of
British pounds as the denominator. "The lower the number, the smaller the Carbon Footprint, which
means the portfolio has lower exposure to the rising costs of emitting carbon and has smaller
impact on global warming."
Well, yes and no. The carbon footprint methodology may very
well help reduce financial exposure to carbon costs, because it is based on the financial yardstick
of revenue. However, this yardstick may present a distorted view of actual environmental impacts,
according to Mark McElroy, executive director of the Center for Sustainable Innovation (CSI) and innovator of
the Social Footprint methodology. CSI is an endorsing partner of the Global Footprint Network (GFN), a worldwide organization
promoting the mitigation of ecological footprints founded by the researcher who conceived the
ecological footprint concept in 1993, Mathis Wackernagel.
"One of the things I like about
Trucost's Carbon Footprint from a sustainability measurement and reporting perspective is that it
has both a numerator and a denominator," Mr. McElroy told SocialFunds.com. "But that is also, in a
sense, what I don't like about Trucost's Carbon Footprint: it has a denominator, but not a
particularly relevant or useful one--what does a company's revenue have to do with the ecological
sustainability of its operations?"
To illustrate his point, Mr. McElroy poses the example
of two companies with equal CO2e emissions. Company A has annual revenues of $1 billion, Company B
has $2 billion in revenue.
"Company B would be ranked higher under the Carbon Footprint
method despite the fact that its impact on the environment is no different from that of company A,"
Mr. McElroy points out.
Simon Thomas, chief executive of Trucost, explains the rationale
behind the methodology.
"Trucost uses turnover as the denominator for measuring the carbon
footprint of companies because we are seeking to compare environmental impacts to output, in order
to answer the question, 'How much environmental damage is incurred for each unit of output?'" Mr.
Thomas told SocialFunds.com. "Trucost is also looking to discover whether these is any correlation
between the carbon intensity of funds and their performance--the research shows there is not."
"Fund managers can use the information to maintain sector exposure in their portfolio but
overweight less carbon intensive companies within each sector relative to the benchmark," he says.
"Through 'carbon optimisation' they can maintain performance but decrease carbon intensity."
Another confounding facet of the methodology is the divergence between the ranking of the F&C
Stewardship Growth Fund (5) and the F&C Stewardship Income Fund
(38). Trucost points out that inherent differences between carbon intensity of income funds and
growth funds cannot account for the disparity, as the Scottish Widows UK Income Fund has a smaller
carbon footprint than the Scottish Widows UK Growth Fund.
Karina Litvack, director of
governance and SRI at F&C, contends that the answer resides not in its funds, which have a "strong
bias toward small and mid-cap stocks," but in the methodology.
"The Trucost report
acknowledges that 'only a minority of companies publicly disclose GHG emissions,' and those that do
provide these data are invariably very large companies that employ CSR professionals," Ms. Litvack
told SocialFunds.com. "So, the analysis is based on a very incomplete picture and general
assumptions about sectors rather than specific information on the companies held within the funds."
Is this charge borne out by the methodology? Trucost states: "Where data on companies is
missing, the total CO2e emitted is divided by the value of the portfolio for which company data is
available; effectively assuming the remainder of the portfolio is invested at the same rate of
carbon intensity as that for which data is available."
The study covers 97 percent of the
F&C Stewardship Fund--by number and value of companies.
Mr. Thomas points out that Trucost
covers 3,200 companies worldwide and will soon release a similar study based on the Russell 1000
Index of US companies.