Reduce, avoid, remove: What you need to know when calculating carbon emissions

Reduce, avoid, remove: What you need to know when calculating carbon emissions

(And the problem with carbon footprint calculators)

Hanna Värttö

Aug 5, 2021

·

10

min read

Many of us are constantly trying to reduce our individual carbon footprint.

Multiple self assessment tests are available online to give an idea of how daily consumption and life choices affect an individual's carbon footprint. These questionnaires usually follow the same logic. To learn about their footprint, people are simply to evaluate their choices of dieting, housing, type of electricity used, frequency of travel and mode of transport used for commuting. Other questions may be more detailed and difficult to answer, e.g. whether they buy food that has been locally produced, or if product packaging is sustainable or not.

Assessing one’s consumption choices can sometimes be difficult. Is it even possible to know how daily consumption items’ production materials have been sourced or from how far the food has been transported to the local supermarket? Luckily the questions that tend to be easier to answer, also represent the choices that matter the most.

UNEP Emissions Gap Report from 2020 reminds us that reaching Paris goals will require a consumption-based footprint to be 2-2.5 tCO2e per capita by 2030. To ensure Paris goals will be reached, the safest bet in terms of lifestyle choices is to focus on reducing emissions related to housing, transport, and food — which all account for roughly 20% of lifestyle emissions.

Which brings us to the next point:

Why not think of investing in a similar way as consumption?

The benefit of assessing an individual's carbon footprint is that it makes one think about what kind of difference can be made by simply spending money to support sustainable lifestyles, and what could an individual improve to reduce their carbon footprint. Making sustainable choices is about choosing what is good both for today's and future generations as well as the environment. What the above-mentioned carbon footprint calculators don't really account for is the share of money that is put to work via investing. Instead, they focus on consumption habits only. (And yet, if we think of reducing consumption, this would make space for more of your financial resources to be available for investing.)

By investing sustainably it is possible to direct money towards companies and assets that align with sustainable goals. In addition to aiming to lower one’s carbon footprint, one could aim for creating more positive impact in their environment and society. Those who care about the planet and are concerned about climate change can, for example, choose to invest via investment funds or directly into companies that contribute to climate change mitigation or generate positive impact.

The current levels of global carbon emissions are soaring high, and companies’ action (or inaction) can make a huge difference in whether emission levels begin decreasing fast enough. Companies that are champions in creating and scaling low carbon solutions could end up lowering the carbon intensity of whole industries by setting a benchmark for other companies to follow. Investing in such companies while lowering the individual carbon footprint can be a powerful combination in terms of supporting a sustainable lifestyle.

How much of a difference can sustainable investing make?

As with assessing individual carbon footprints, there is not always enough information available for evaluating the goodness of one's investment choices. To estimate how much of a difference sustainable investing can make requires setting a point of comparison.

But should the comparison be between having money in a regular savings account vs. having the same amount invested in a sustainable investment fund?

It’s a complex question to answer.

Estimating the carbon footprint of money in a bank account can be challenging as there rarely exists sufficient details to create such calculations. Still, it is possible to compare the “goodness” of funds’ performance against its own past performance or against other mutual funds, ETFs, or indices.

For comparisons to be informative rather than simply misleading, enough data should be available and comparable across funds. This sets some boundaries to comparisons as not all companies or funds report emissions. A recent paper, ESG Asset Owner Survey: How Are Investors Changing?, found that 46% of investors who participated in the survey were already assessing the carbon emissions of their investments, with almost a third of increase from the year before. As more asset owners and fund managers start disclosing key carbon metrics, the more transparency there will be for investors to decide where to put their money.

Yet here’s the tricky part: Even when carbon footprint data is made available and comparisons are technically possible, it is not always obvious whether the results are positive or not.

These simple comparisons show significant reductions in carbon intensities. Yet, one needs to understand why intensities went down to be able to assess the goodness of these metrics for different funds or indices.

Fund carbon intensities can go down due to changes in underlying portfolio companies’ carbon intensity (which can be affected by changes in company’s revenue or carbon emissions), or by simply replacing high carbon assets in the fund with more sustainable companies. Divesting and replacing high emitting companies with low emitting companies doesn’t however equate to any real world reduction in emissions, it just means shifting of assets and emissions from one owner to another (while making the fund carbon metrics look better).

To support emission reductions through investing means supporting the companies that are effectively reducing their own emissions and preferably also contributing to increasing energy efficiency, use of renewables, and adoption of climate mitigation solutions beyond their own operations (i.e. companies helping in transitioning industries towards Paris goals).

Is it possible to invest in reducing emissions?

Recent Sustainable Finance Disclosure Regulation defines the so-called “dark green” Article 9 funds as funds that have set sustainable investments as their objective. This can mean investments contributing to environmental objectives and, for example, funds that have set reduction of carbon emissions as their objective. Identifying Article 9 funds that are aiming to reduce carbon emissions is a good point of departure. Not all funds aiming to reduce carbon emissions have been publicly promoted as Article 9 funds, and even less funds have specifically claimed reducing emissions as their target. Yet, having such labeling in place should help investors guide their way towards sustainable funds that have emissions reductions as their objective.

But having a label is not enough. Climate-focused funds with targets of reducing emissions should have clear strategies in place to do so. In essence, the strategy should consist of investing in companies that contribute to reducing emissions over time as opposed to trying to achieve “carbon reduction” goals via divesting. Surely aiming to reduce the fund's carbon footprint by shifting around assets and divesting from carbon-intensive assets contributes to providing another lower carbon intensive option for investors to choose from. But again, the amount of emissions being released to the atmosphere does not change as a result of such a strategy.

How many emissions can be reduced?

In its 2019 Emissions Gap Report, the UN Environment Programme (UNEP) called for cutting global emissions by more than 7% annually to reach Paris Agreement goals. The EU’s current target is to reduce emissions by at least 55% by 2030, a target that had previously been set at  40%. Key elements to reaching these goals are increasing the share of renewable energy and improvement in energy efficiency.

Yet by looking at current levels of carbon emissions being reduced annually by companies, it is easy to notice that the pace needs to increase — and fast. There are 9000+ companies currently providing climate-related disclosures to CDP. About 1600+ companies have committed to setting Science Based Targets for reducing their emissions, while 800+ companies have already publicly disclosed those via the Science Based Targets initiative. But reviewing companies’ annual disclosures reveals that not all have been able to maintain the pace of reducing their emissions.

When aiming to invest in companies that are reducing emissions, it is well worth looking into where the most potential for reduction lies. According to UNEP, four sectors alone — energy, industry, transport, and buildings & cities — account for almost ¾ of the reduction potential. For example, increasing the energy efficiency and use of renewables globally could lead to a massive 12.5 GT reduction of emissions.

The Six Sector Solution to Climate Change
SOURCE: UNEP

By looking at past reductions in carbon emissions per sector, lower carbon intensive sectors, such as financial industry or health care, may present relatively high current percentages of annual decrease. Whereas by looking at more carbon-heavy industries (where the change is needed most urgently), the evidence shows that past reduction rates have not been to the level of urgency required. Nor can the current reduction targets be considered as sufficient. Much is still to be done to reach the goals.

As when prioritising individual consumption choices according to their impact on reducing individual carbon footprint, focusing investment and engagement efforts to the sectors that have the most emission reduction potential should be the first priority. If targets are not ambitious enough neither are the existing targets being met, investors and policy makers alike need to increase the pressure for action.

Will reducing emissions solve the climate crisis?

Reducing carbon emissions is critical to reaching net-zero emissions targets that many companies and investors have committed to. Yet it is worth keeping in mind that reducing emissions is one of multiple ways towards reaching net-zero targets.

In addition to reducing the amount of emissions generated every year, it is vital to make efforts to avoid emitting carbon altogether and removing the carbon that’s already in the atmosphere.

Companies and policy makers may have a strong say on what action to take with regards to fighting climate change, yet individuals can make a difference not only through their consumption choices (and lowering individual footprint) but also by investing in companies and voting for policy makers whose actions support the transition to net-zero emissions.

If contributing to climate change mitigation is the objective, then companies and investors alike should be seeking the most effective solutions not only to reduce but to avoid and remove emissions. Renewable energy and energy efficiency solutions are needed to replace carbon intensive energy production globally helping to avoid emissions that would have been generated through fossil fuel energy sources. Reducing emissions is more important than ever — but it should not be the single guiding metric for action.

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