It comes as Climetrics this week updates its methodology to assess funds investing in companies that have made tangible commitments to align business models with the Paris climate agreement target to keep global warming below 2 degrees. Its analysis criteria covers portfolio holdings, the asset manager’s public action on climate change and the fund’s investment policy.
The searchable database now rates 3,700 funds representing approximately half of all assets in funds.
Last month, Morningstar launched the Portfolio Carbon Risk Score. Funds with low carbon-risk scores and low fossil-fuel exposure receive a designation from the ratings agency. Morningstar assesses carbon intensity, fossil fuel involvement, stranded assets risk and green solutions.
Both research providers said carbon footprinting was one dimensional and touted their forward-looking approach to portfolio analysis, which takes into account companies’ strategies for reducing their environmental footprint.
Fund managers have the option to use these third-party firms or adopt in-house metrics, but Portfolio Adviser found mixed methodology in the industry, creating confusion for investors keen to ensure funds live up to their ethical promises.
Carbon footprinting
Liontrust Sustainable Future funds use carbon footprinting, even though manager Mike Appleby describes it as one dimensional.
“It’s a start, we do it and will continue to do so, but it has limitations,” Appleby says.
Sustainalytics executive vice president Diederik Timmer said under carbon footprinting Tesla and General Motors are indistinguishable in terms of their environmental impact. Sustainalytics company data informs the Morningstar Portfolio Carbon Risk Score.
Timmer says carbon footprinting of funds will continue, but stresses sustainability is not just a matter of reducing carbon emissions.
Skagen funds is likely to begin carbon measurements of portfolios, although it does not currently do so, says ESG specialist Trygve Meyer. Quality of carbon data was one major obstacle, Meyer says.
“That said, it can be compared to trying to lose weight,” he says, stating the direction of travel is more important than the level.
“It doesn’t matter how much the scale is wrong as long as it is consistently wrong.”
Head of Climetrics Nico Fettes says carbon footprinting represents the status quo of a company. “It’s a backward looking piece of information and it doesn’t tell you anything about the future plans of the company. As an investor you want a glimpse into the future.”
Fettes says that is why they have included participation in the Science Based Target Initiative in Climetrics new methodology. The initiative ensures companies have a workable strategy to reach Paris climate targets.
Bond problems
Carbon or water analysis for fixed income portfolios can be difficult for fixed income portfolios, particularly sovereigns, says Bluebay head of ESG investment risk My-Linh Ngo.
Sourcing data on private companies is also an issue that listed equity fund managers don’t have to deal with, says Muzinich and Co chief administrative officer Cheryl Rivkin.
Portfolio Adviser spoke to one fund house that said calculating a stake in a company’s carbon footprint is easier for equity managers rather than those purchasing the business’s debt.
The Rathbone Ethical Bond fund does not conduct a carbon footprint analysis.
Fund manager Bryn Jones says they measure the fund’s positive activities and categorise these based on the primary attribute, such as good environmental management or the provision of solutions to the challenge of climate change.
Data shortcomings
Sufficient environmental data simply isn’t available to report on all the environmental impacts from a portfolio of companies, says Appleby.
Liontrust’s key performance indicators (KPIs) focus almost exclusively on climate change, such as measuring carbon dioxide emissions from operations and tier one suppliers, fossil assets exposure, plus proportion of assets committed to reducing carbon emissions.
However, Appleby says the data does not capture carbon dioxide emitted from a company’s products or services, plus it ignores every other environmental impact of the business.
He listed water use as the next obvious candidate for portfolio reporting.
Ngo says investors are already analysing water footprints of their funds. These are used like carbon footprints, which can be compared to benchmarks or used to continuously reduce the absolute environmental impact of the fund.
Climetrics has built in indicators on deforestation risks.
Intentionality
While ethical funds, such as Janus Henderson Global Sustainable Equity and Royal London Sustainable Leaders Trust, land top ratings in Climetrics new analysis, other products that are not earmarked as sustainable products also feature.
Janus Henderson says its fund does target a low carbon footprint, but its other products that landed a five-leaf rating do not. These include Global Growth, US Forty and US Growth.
Investors focused on sustainable investing are increasingly looking at the so-called intentionality of their products, namely whether they are deliberately focused on sustainability outcomes. Theoretically, this reduces the risk that funds rated highly on sustainability drift into unsustainable products as their portfolio changes.
Aviva Global Equity Endurance fund manager Giles Parkinson says he tends to favour asset-light areas of the economy over capital-intensive industries. This means the fund is more likely to hold software or consumer brands, which tend to be less polluting, over oil and gas or heavy manufacturing.
The Global Equity Endurance fund received a top rating under the new Climetrics ratings, but is not earmarked as a sustainable fund – although it uses an ESG approach used across all Aviva Investors’ funds.
Climetrics says intentionality is reflected in its focus on asset manager’s public action on climate change and the fund’s investment policy. However, it says if a portfolio shifts that will be reflected in the Climetrics rating.
Fettes says around half of funds that earned a top Climetrics rating are dedicated sustainable funds.
“I quite like this result because it gives a broader choice for people to invest in. But it also says of the funds that many of these funds that use a sustainability approach do actually do a good job on climate.”
Around two thirds of funds that receive the Morningstar low-carbon designation are focussed on reducing their footprint, according to Timmer.
