It’s wrong to compare investment products based on emissions only. Here’s why

It’s wrong to compare investment products based on emissions only. Here’s why

How to make sense of emission calculations in sustainable investing.

Hanna Värttö

Apr 14, 2021



min read

Have you ever tried to compare investment funds’ performance in terms of portfolio carbon footprints? If you have, you may have found that it can be quite a task to spot the best-performing funds.

To begin with, you may not want to compare funds simply based on their total carbon footprint or financed emissions (i.e. the GHG emissions financed by the portfolio investments).

One key metric used to compare funds (in addition to absolute financed emissions) is Weighted Average Carbon Intensity. This metric is calculated by taking investee companies’ emissions (measured in CO2e) divided by their revenue, and allocating the proportional share corresponding to the fund investment.

Are best funds the ones with the lowest carbon footprint? If you look at some of the climate- or sustainability-oriented investment funds and compare them with a global stock index like MSCI or S&P, for example, it may surprise you to see that these ‘sustainable funds’ may have even higher carbon footprints than the index.

Take a quick look through existing online resources, such as Invest Your Values Fossil Free Funds’s online tool, for example, where you can compare carbon footprint and intensities of ESG screened ETFs with different indices:

Carbon footprint emissions per unit of investment

As with many sustainability-related metrics, carbon footprints and intensities are interesting in themselves — but what is more noteworthy is how they evolve over time.

For example, an investor who only invests in companies with low emissions may have a portfolio with lower-than-benchmark carbon footprint. Yet, this does not necessarily mean that the investee companies are climate-conscious or have made significant efforts to integrate climate change as part of their strategy, planning and operations. Low-emission companies may simply be the ones whose business and activities are not emission-intensive. Perhaps it is not even on the radar of the company to reduce their carbon footprint — something you wouldn’t know if you don’t take a closer look at that company.

The story changes somewhat if we consider Scope 3 emissions in the calculations, i.e. the emissions not directly related to company’s own operations or corresponding to use of electricity. Yet Scope 3 can be the most relevant type of emissions — for example, for a logistics company. Not including these indirect emissions in footprint calculations could lead to a significant underestimate of the actual emissions associated with the company. Scope 3 can be challenging to quantify, of course, which is why many companies do not report them fully. If not reported, Scope 3 emissions can still be sometimes estimated. But no estimate or calculation represents the absolute truth. As disclosure differs across companies, so it does for investment products, making the comparison challenging.

To contribute to harmonising disclosure practices, multiple financial institutions have collaborated through Partnership for Carbon Accounting Financials to create the Global GHG Accounting and Reporting Standard for the Financial Industry. Recent regulation on sustainability related disclosures or climate benchmarks should increase transparency in reporting of emissions and facilitate use of benchmarks. Yet, even with both company and investor disclosure improving, comparisons between companies and investment products should be done with caution.

Let’s take a couple of simple examples.

“Even with both company and investor disclosure improving, comparisons between companies and investment products should be done with caution.”


Some funds invest in companies that contribute to positive change by reducing emissions and actively working towards the Paris Agreement goals. Current emissions or temperature alignment of such companies may be higher than average, but, if truly committed to reach the temperature alignment goals, these are the companies that can actually make a difference. Funds investing in such companies need to be active in their engagement and shareholder voting efforts to encourage this change.

Another example could be to compare a fund that invests only in low-emission sector companies with a fund that purely invests in companies providing renewable energy solutions. The carbon footprint is likely low for both funds, although additional positive impact is likely created by the latter fund (e.g. through providing access to clean energy). Although both of these examples may result in low emission portfolios, fund narratives are very different from the climate perspective and should not be compared purely based on emission metrics.

When browsing through funds, it’s useful to look for some of the following information to help understand how the fund’s sustainability or climate angle has been embedded in building the portfolio:

Assessing investment products through their emission intensities is not enough to deliver the full picture.

Current data and metrics have their shortcomings, especially when used for comparative purposes. In lack of universally applicable metrics, transparency on investment product strategies becomes more important. To be able to assess whether an investment fund performs well or not, it is critical to have a clear understanding of what the fund ultimately aims to achieve. For example, an investment product that aims to accelerate transition in the coming years may initially perform worse when measured by traditional static or backward-looking metrics — but ultimately show true potential when measured by forward-looking metrics, i.e. the future impact such transition will generate. Meanwhile, an investment product currently showing low emissions and close to Paris Alignment may not be able to contribute much positive real world impact going forward.

Here’s how to go around it:

Adding forward-looking metrics as part of analysing climate-related performance helps in identifying companies that are well-positioned to address climate change in the future. Take a look at  emission reduction targets set by companies (as well as their current emissions) and compare these to the remaining carbon budget (there is a limited amount of carbon budget available for the coming years) and potential carbon price scenarios. How much will the company’s bottom line be affected by the increase in the price of carbon? What actions has the company taken to mitigate for this cost?

In addition, adding transparency on portfolio construction processes and disclosure practices allows for better comparison between investment products and helps (all of us interested in the details!) assess the climate performance of funds with differing strategies.


When comparing various investment products from a sustainable perspective, things are not as black and white. As always, the truth lies below the surface.

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