Green investment: Put your money where the carbon isn’t

factory pipes on a background of the city

What do a company’s carbon emissions tell you about its long term prospects? Grantham Institute Director of Innovation Prof Richard Templer takes a first look at ET Index’s ranking of businesses according to their climate change credentials.

Christmas is more usually associated with giving rather than investing, and the New Year with minimising our waistlines rather than diminishing our carbon footprints.

But if, like me, you occasionally worry about what your pension’s impact on the planet may be or whether you are the proud owner of assets that may soon become stranded on the shoals of a low carbon future you may want to spend a quiet moment reading ET Index’s new corporate carbon rankings over the Christmas break.

For the second year running, ET Index has released a public ranking of the climate change ‘worthiness’ of the world’s 2,000 largest companies. The index consists of a calculation of the CO2 emission intensity of each firm – in other words, the amount of CO2 emissions associated for each US dollar of revenue generated. This measure can be used to understand the risk they represent within an investment portfolio as we move towards a zero carbon economy.

Under the global climate deal sealed in Paris last year, the world has set its sights on reducing carbon emissions to zero by the end of this century. Businesses driving their emission intensity down clearly understand what it takes to thrive in this low carbon world. With the total emission intensity of the 2,000 businesses ET Index looked at decreasing by 2.8% the low-carbon transition is clearly happening. But companies trailing at the bottom of the rankings have yet to demonstrate that they are capable of rising to the challenge ahead, possibly representing a significant risk to investors.

The index makes fascinating reading. The first fact that jumps out at you is that companies that have lower CO2 emissions are simply providing better returns on investment, precisely 1.78% more per annum. So even if you are not too fussed by the use your money is being put to you should be asking yourself why you would not want to move your money into these companies. In the longer term such a shift in investment also combats the loss in the value of shares brought about by a rise in global temperatures – at current rates of warming, this is about 0.1% loss per annum.

Setting standards

The second fact that caught my attention is that within business sectors there are frequently wide variations in carbon efficiency. If the worst emitters adopted the performance standards of the average for their sector, huge reductions in emissions could be made. For example even the non-renewable resources sector could achieve 28% reductions, equivalent to the annual emissions of Saudi Arabia. If the oil and gas sector lowered emissions to the best in class, its emissions would fall from over 1.2 billion tonnes of CO2 to under 0.03 billion tonnes. So even the industries whose products will become defunct can clean up and be more profitable and the ranking points to those who are serious and therefore a better investment and those who are not.

In essence, the index points to those who are most likely to shape the new low carbon economy and those who will fall. Those that fully report on their own and their value chain’s emissions are the ones that are grasping the realities of climate change and the opportunities it offers. Read the listings – the results are often surprising.

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