Why does carbon footprint not tell us the whole story?

DNB Renewable Energy’s Portfolio Managers invest in sustainable solution providers for a better environment. Identifying the companies delivering such benefits requires deep, bottom-up analysis.

- People are increasingly interested in investing both for a better environment and for good returns. It is therefore important to demonstrate how we select companies which contribute with solutions to environmental challenges, whilst also creating value for shareholders, says Laura McTavish, Analyst in DNB Renewable Energy.

She says that the Portfolio Managers, Christian Rom and Stian Ueland, seek to build a portfolio of companies that contribute to a better environment, and which also deliver a good return on investment.

How do we analyse companies

Her team works to continuously document the impact that the companies have on the climate and environment. The team analyses the companies they invest in and wish to be transparent with clients about how that analysis is conducted. Typically, carbon footprint is used as a metric to tell us about how companies impact the climate, and, subsequently, how exposed they are to transition risk.

- Whilst carbon footprint is important, it does not tell us anything about the positive climate impacts that a company delivers. Understanding positive contributes requires complex analysis which goes beyond carbon footprint, says McTavish.

Beyond carbon footprint

McTavish says that more and more people want to invest in funds that invest in companies delivering environmental benefits. She points out that the companies that deliver the solutions needed to deliver the green transition also emit carbon when their products are produced.

- The carbon that the companies emit must be considered against what the companies potentially contribute with potential avoided emissions. For example, when renewable energy capacity is installed, it will provide low-carbon energy for decades to come, she continues.

This is why the team has reviewed the companies in the fund to be able to understand how the companies contribute to a better environment, and to quantify how the companies’ products potentially contribute to reduced emissions in the long run.

- ISS-ESG’s analysis shows that the fund’s underlying holdings potentially contribute to six tonnes of avoided emissions per ton emitted, McTavish says.

The team considers how much companies delivering renewable energy, such as solar and wind, will generate now and in the future compared to emissions generated from today’s energy mix. This gives us an indication of how much carbon this renewable energy can potentially avoid.

- As even green companies emit carbon when producing their products and services, it is important to highlight that starting from 2022, we have committed to engaging with at least 80% of the portfolio holdings by weight on science-based net zero target setting, she says.

Looking for “less obvious” solutions

The team looks for investment opportunities within “less obvious” sectors, beyond renewables, that are needed to move the needle in the right direction.

- Are there companies that contribute positively to the environment within the textiles industry? Are there companies that contribute to the decarbonisation of buildings?

She points out that these sectors have large emissions and should not be ignored just because they have a high carbon footprint, for example.

- We are also willing to look for opportunities along value chains, from companies that extract natural resources, to companies have develop markets, optimise production, and help their customers by offering greener products, says McTavish.

This makes the job more complex, but it is our role as active managers to make these assessments and balance different considerations.

She highlights that the calculations of potential avoided emissions figures are associated with uncertainty and varying data quality. These therefore reiterate the team’s thinking, but do not specifically guide investment, and are not used to claim net zero alignment.

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