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Results from the 2018 carbon footprinting of our equity funds

By Esmé Van Herwijnen, Responsible Investment Analyst
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This summer has been one of extremes. Wildfires have wrecked destructive havoc in many places, including California and Scandinavia. Temperatures have broken new records, causing an increase in heatwave related deaths and severe droughts affecting agriculture. But this is not just an anomaly, and its not just a nice warm summer.

This is climate change and it’s only getting worse.

At the Mauna Loa Observatory in Hawaii, where they monitor and collect data related to atmospheric change, the level of CO2 in the atmosphere has now been recorded approaching 410 parts per million (ppm) on average. For context, 350 ppm is the accepted “safe” concentration of CO2 in our atmosphere. And as the earth starts to warm, it gets harder and harder to reverse the effects of climate change - melting ice causes the oceans to absorb more sunlight, or melting permafrost causes the release of trapped methane - which will further hasten the onset of global warming.

This is why investors really cannot ignore climate change. Climate change risk presents itself in many different forms, and depending on where companies operate they will face a combination of physical, transition and regulatory changes that could leave them exposed to the wide-ranging impacts of climate change, unless they are ready to meet and manage these risks head-on. 

As responsible investors, climate change is already well integrated into our investment approach. Through our screening process and active engagement with companies, we aim to better understand and reduce climate change risk in our portfolios. Carbon footprinting our portfolios is a helpful part of this process. 2018 is the third consecutive year that EdenTree has conducted carbon footprinting of its equity funds, the result being that we can begin to identify wider trends with a greater degree of accuracy. 



YoY comparison of EdenTree carbon footprinting results

This year’s results saw no major differences to the carbon intensity of each of our equity funds, due to the relative low turnover our portfolios experience. The Amity Global Equity Fund and UK Equity Growth Fund have seen the largest reductions this year, principally because they have both sold out of particularly carbon intensive holdings over the last 12 months. 

Comparing the results of our equity funds to their respective benchmarks serves to highlight the carbon-aware nature of our portfolios. Except for the Amity European Fund, which is more or in line, the other portfolios have carbon intensities that are well below their benchmarks. The funds’ outperformance can be mainly attributed to stock selection. Even where we are invested in sectors that are carbon emission heavy (as the Amity European Fund is in particular), the stocks that we hold in those sectors are low emitters compared to their peers.



Carbon Intensity of EdenTree Equity Funds vs Benchmarks

As usual, we use the results of our annual carbon footprinting to drive engagement with those higher emitting companies that we invest in. We assess emission trends and also how companies are aiming to address their emissions through reduction targets.

It is not always this straightforward however -  whilst some of the companies in our equity funds are large CO2 emitters and thereby contributors to climate change, they may also be making a positive sustainable impact in other ways. For example, one of the heaviest emitting companies in the Amity European Fund is Veolia Environnement, a waste management specialist, but which also provides recycling services. Equally, a cardboard manufacturer such as DS Smith releases carbon through the energy intensive process of making paper. However with its almost entirely recycled fibre usage and providing alternatives to plastic, the company’s environmental impact cannot be considered as bad as its emissions may suggest. 

Because of these complexities, this year our analysis has gone beyond the standard measure of looking at emissions financed per GBP invested. For the first time we have also looked at exposure to carbon reserves. Within the funds, exposure to the energy sector is limited, and as a result so is our exposure to carbon reserves. Gas, coal and oil reserves will potentially be exploited and burned in the future and are thus associated with potential future emissions. All our funds have very low carbon reserves which means they are also less exposed to transition risks in the future.

Another new form of analysis we have conducted this year is to look at science-based targets. Science-based targets are emission reduction targets set by companies that are in line with the two-degree scenario pledged as part of the Paris agreement. So far only 422 companies globally have set science-based targets (SBT) and registered those as SBTs. As part of our engagement this year, we will be asking companies to set reduction targets which are in line with the Paris Agreement and to assess whether those targets are sufficiently ambitious. 

The full results of the carbon footprints as well as an explanation of the methodology are available here:

We have also conducted the analysis for our non-screened UK Equity Growth Fund

Further information on EdenTree’s approach to climate change can be found in our Amity Insight: The Energy Paradox in which we examine how to meet rising energy demands in a carbon constrained world and what this means for responsible investors.

 

 

The value of an investment can fall as well as rise as a result of market and currency fluctuations, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. If you are unsure which investment is most suited to you, the advice of a qualified financial adviser should be sought. EdenTree Investment Management Limited (EdenTree) Reg. No. 2519319. Registered in England at Beaufort House, Brunswick Road, Gloucester, GL1 1JZ, UK. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association.