Case Studies

Environment Agency Pension Fund

We ask all of our portfolio managers to measure the environmental and carbon footprint of active equities and bonds using a mutually agreed provider. Once the carbon footprint is measured, we discuss the results with portfolio managers, who might suggest corporate disclosure, opportunities to reduce emissions, re-evaluating the investment case for a holding.

Inputs are calculated via a company’s supply chain, and waste outputs via publically available information. A carbon footprint is compiled for each equity manager, by allocating the environmental impact of each company proportional to the amount of stock that is held. For corporate bonds, each holding’s contribution is based on the bond value as a proportion of the enterprise value.

www.eapf.org.uk

PORTFOLIO – Active Equity Fund + MSCI ACWI
BENCHMARK – Active Equity Fund + MSCI ACWI
PORTFOLIO – Active Corporate Bonds+Customised Benchmark
BENCHMARK – Active Corporate Bonds+Customised Benchmark

Local Government Super

We receive six-monthly ESG and Carbon Risk Audits from MSCI ESG Research on our Australian and international equity portfolios, individually and in aggregate. The carbon footprint measurements they provide are portfolio carbon emissions, scope 1 and 2 (million tCO2e) and portfolio carbon intensity (tCO2e by revenue).

While this data is not sufficient to fully understand the carbon risks in our portfolio, we find having some quantitative data valuable, rather than relying entirely on qualitative assessments. The audits and the carbon footprint measurement provide answers to some key questions:

  • How are our portfolios’ carbon footprints positioned relative to their benchmark? Could this be a reason for relative out/under performance?
  • Are there any sectors that have particularly large carbon footprints? If so: What are the potential responses?
  • Do any of our external managers have particularly high or low carbon footprints? If so: What are the reasons? Is this an opportunity to engage? Are the managers well-informed on carbon risks?
  • Are our low carbon themed allocations actually low carbon?

The quantitative data also allows for some basic scenario analysis. We can start considering the impact a global carbon price will have on our portfolio, and from there develop future carbon cost-curve scenarios to model for increasing carbon legislation. The quantitative analysis that can be done will improve as carbon disclosure from companies increases, methodology for measuring carbon footprints becomes mores settled (particularly around scope 3 boundaries and definition) and the regulatory response to carbon emissions becomes clearer.

We use the carbon footprint measurements and audits as a means to communicate our efforts to address carbon and ESG risks. They are published on our website (see “Local Government Super Carbon and ESG Risk Portfolio Audits”).

At 31 December 2014, our ASX and international portfolios had, relative to their benchmarks, 14%/30% lower carbon emissions respectively and 16%/18% lower carbon intensity.

www.lgsuper.com.au