The global consensus is that reducing greenhouse gas emissions as quickly as possible is likely the only way to stave off the worst of climate change. What does this mean from an investment perspective?

Accounting for carbon
Perhaps the surest way to avoid investments in companies with high carbon emissions is by divesting from fossil fuels. Excluding oil, gas, fossil fuel-fired utilities, and coal mining would mean fewer financed greenhouse gas emissions. However, blindly excluding the energy sector may also mean portfolios composed entirely of healthcare or technology companies.

Although these companies contribute little to overall carbon emissions, a portfolio entirely composed of them is not necessarily better than the status quo. This highlights the need for investors to consider solutions that facilitate the transition to a more sustainable economy – including products and services that improve energy efficiency to renewable energy systems, electric vehicles, and more.

Measuring sustainability
Implementing these principles can take several forms, but all share the same basic idea: no matter the sector, any meaningful climate strategy is about reducing fossil fuel exposure and increasing the share of climate-friendly activities. A key tool for measuring climate impact is carbon foot-printing; after all, we can’t manage what we can’t measure. Two types of emissions are easy to count and are widely available: direct emissions from fossil fuels burned on company premises and emissions from electricity/heat used. This has been the main type of data used by investors looking to assess and improve the carbon profile of their funds.

Beyond direct emissions
However, Mirova is convinced that going beyond direct emissions is essential to providing meaningfully sustainable, climate-friendly investment products. Accounting for raw material extraction, transportation, and final use of products is also necessary, since these “lifecycle” emissions dwarf direct and electricity-related emissions in several key sectors. The use phase of an oil company or automobile manufacturer’s products, for example, typically comprises over 80% of their carbon impacts . Ignoring these emissions obscures a portfolio’s true climate profile and can lead to counterintuitive conclusions.

Lifecycle vs. Low Carbon
Relying only on the available direct and electricity-related emissions data can produce portfolios and indices that do not live up to their climate-friendly claims. Once emissions are accounted for using a lifecycle approach, “low-carbon” indices based exclusively on direct and electricity emissions often have carbon footprints very similar to their traditional counterparts (i.e. with no carbon considerations). Some of these indices hold large positions in oil majors that have made small reductions in their operational emissions – without addressing the incompatibility between the fight against climate change and the company’s existing business model.

Considering the emissions saved relative to a baseline also produces another essential indicator of a company or portfolio’s exposure to solutions providers for the energy transition. Otherwise, two companies with similar lifecycle carbon emissions are seemingly indistinguishable, even if one provides technological solutions that could be instrumental for mitigating climate change and the other provides a product with low or no added value for the climate.
Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices, therefore a portfolio's universe of investments may be reduced. It may sell a security when it could be disadvantageous to do so or forgo opportunities in certain companies, industries, sectors or countries. This could have a negative impact on performance depending on whether such investments are in or out of favor.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted and results will be different. Data and analysis does not represent the actual or expected future performance of any investment product. Natixis believes the information, including that obtained from outside sources, to be correct, but cannot guarantee its accuracy .

Mirova is operated in the US through Mirova US LLC (Mirova US).

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