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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: F&C Stewardship Growth Fund, CIS Sustainable Leaders Trust, Henderson Global Care Income, and Standard Life UK Ethical Fund.

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 (SF6).

"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.

 

 
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