Cutting your carbon footprint through your investments

Cutting your carbon footprint can be done in many ways, including through your investments. Patrick Thomas of Canaccord Genuity explains how.

 ESG investment innovation opportunities

The UK is already on the front foot with environmental initiatives. For over a decade the country has been a climate leader and the effects of the  covid-19 lockdown will motivate government and industry to take things further. We have the fastest decarbonisation rate of any major economy in the world. UK emissions have fallen by 42% since 1990, while economic productivity has risen by two-thirds (pre crisis figures, naturally).

A two-person household in the UK emits approximately 21.4 tonnes of CO2 each year, while a family of four creates 28 tonnes. About 25% is due to electricity and heating and another 25% down to the cars we drive. Through using electric cars, insulating our houses using LED lightbulbs and reducing our meat intake, we can potentially reduce our household carbon footprint by 25-50%. And we can reduce it further through our investments.

An innovative and clean approach

The UK has long been an innovator in creating strategies that help both the planet and investors’ portfolios. A decade ago, tax subsidies via enterprise investment schemes and venture capital trusts encouraged investment into renewable energy. These tax breaks are not around any longer, but there are a number of ways investors can make a difference.

1. Lower your exposure to carbon intensity. Some sectors and companies emit more carbon than others. Think of the difference between a software provider and a coal mine. Different global market indices have a different exposure to carbon intensive sectors, like energy. For example, your annual CO2 emissions can be reduced by switching from a traditional global equity index (like the MSCI World Index) to an ESG index, which has a lower exposure to carbon intensive businesses. Or by switching to a dedicated low carbon index, which has bigger positions in low carbon businesses.

2. Consider funds and companies that reduce carbon emissions. Some companies provide products or services that help the world use less carbon. Think of an electric car maker. You can choose to go further and look at funds that actively invest in companies helping the world reduce its carbon emissions.

3. Explore global environmental solutions. The Impax Environmental Markets Trust was one of the first in the UK to invest globally only in ‘pure play’ companies providing solutions to resource scarcity and environmental pollution through their products or services. Underlying companies must have more than 50% of their revenue generated by sales of environmental products or services in the energy efficiency, renewable energy, water, waste or sustainable food markets. Some of the benefits realised with a £10m investment in this strategy last year included: the avoidance of net CO2 emissions of 5,800 tonnes, equivalent to taking 3,050 cars off the road; and the production of 1,540 megawatts of renewable electricity, equivalent to 410 households’ electricity consumption.

4. Participate in UK-led green energy.

The UK is now a world leader in the production of green energy: 25% of the electricity generated in the UK last year came from wind, solar and other renewable energy sources – three times what it was in 2011. The UK is the world leader in offshore wind, with more installed capacity than any other country. The Renewables Infrastructure Group was the first fund in the UK with a mandate to generate sustainable returns from a diversified portfolio of renewables infrastructure that contributes towards a zero-carbon future. It invests directly in solar and wind projects in the UK and is responsible for powering the equivalent of one million homes a year. The renewable energy generated by this trust avoids 2.7 million tonnes of CO2 annually.

For those with an investment portfolio, one of the easiest ways to reduce your carbon footprint can be to change your investment approach. And as we have already established, you do not have to sacrifice returns for your commitment to environmental concerns.

Comparing the MSCI All Countries World Index (ACWI) to the MSCI ACWI ESG Leaders Index and the MSCI ACWI Low Carbon Leaders Index since September 2007, the indices – during crashes and bull runs – have had virtually the same performance. Impax Environmental Markets has significantly outperformed the FTSE All Share over the past 15 years.

Carbon conscious investing is not just good for the planet – it is good for your pocket too.

Patrick Thomas is head of ESG Investing at Canaccord Genuity Wealth Management.

More by Patrick: ESG themes for 2020 and how to invest in them

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. This is not a recommendation to invest or disinvest in any of the companies or funds mentioned. Names of companies and funds are included for illustrative purposes only.

Comments (0)