Published on: June 27, 2024
Gillian Davison, Senior Analyst, Climate Change
You could think of an investment portfolio’s carbon footprint as the grade average in a school class. While it may provide a general idea of how things are going, taking a closer look provides details on standout pupils or others that show potential in specific areas. To illustrate how such analysis can be useful in going beyond an overall number, let’s take a look at our Climate Transition International Equity Pooled Fund.
Carbon footprint analysis provides investors with a view of the relative exposure of portfolios, sectors, and individual issuers to climate-related transition risks. In other words, it illustrates potential costs to society associated with moving to a low carbon economy. It also presents the relative contribution that a portfolio and its constituents are making to global carbon emissions.
Companies That Take Steps
As part of our engagement toward a net-zero future, three years ago we created Climate Transition Funds. Their objective is to support companies that are taking necessary steps to reduce their greenhouse gas (GHG) emissions and support pathways to net zero in both their sectors and the economy at-large. Available in Canadian or International equities, they feature eligibility criteria as well as engagement with those companies to encourage their efforts in enabling real economy emissions reductions.
As at December 31, 2023, the carbon footprint for the International Equities Climate Transition Pooled Fund was nearly half that of the MSCI EAFE Index. The Fund’s weighted average carbon intensity (tons CO2e/USD$M revenue) was 56.9, compared to 98.0 for the Index.
Diving Into Data
However, taking a closer look reveals that the Fund’s carbon footprint is in a large part driven by two Japanese holdings that are part of the industrial sector, Nippon Sanso and Air Water. As it happens, the potential role that industrial gas companies can play in the energy transition is one that has been drawing increasing attention, particularly due to the production of hydrogen. In other words, the portfolio’s carbon footprint could one day be even lower.
Currently, the industrials sector accounts for 25% of global carbon dioxide (CO2eq) emissions. On the surface, one may question why such carbon-intensive companies are selected for inclusion in a fund whose mandate is to reduce emissions. However, the companies we select for inclusion into our Climate Transition Funds must show commitment to emissions reduction targets.
Following are commitments made by both Japanese companies mentioned earlier:
Nippon Sanso
- Nippon Sanso has a “Carbon Neutral World” strategy, outlining its commitment to reducing the industrial gas industry’s carbon footprint. Its strategy involves goals to reduce its operational carbon footprint (Scope 1 and 2) and a commitment to support its customers to lower their carbon emissions through its product offerings and applications (Scope 3).
- The company has committed to allocate 38,000 million yen (more than CAD $330 million) over four years to strategic investments including carbon neutrality. Part of this involves expanding into markets such as carbon capture, use and storage (CCUS) and green fuels such as biofuel and green hydrogen (green hydrogen is produced through electrolysis of water, using renewable energy such hydroelectricity, solar, wind, etc.)
- At year-end 2023, Nippon Sanso had managed to reduce its Scope 1 and 2 emissions by more than 12% compared to a 2019 baseline year, and in 2023 alone helped its customers to avoid more than 7.3 million tonnes of CO2 emissions (Source: 2023 Integrated report)
Air Water
- Air Water aspires to achieve carbon neutrality in its business operations (Scope 1 and 2) by 2050, while also committing to decarbonize its entire supply chain. Through its Environmental Vision, Air Water defines its goal to support the transition to a decarbonized society in which humanity and nature can coexist. Through innovation of green energy technologies, the company aims to create opportunities responsive to the expansion of low-carbon and carbon-neutral markets.
- Air Water has committed to creating products and services contributing to reducing greenhouse gas emissions in society including biofuel. In late 2022, the company began the operation of the first bio-LNG (liquified natural gas) production plant in Japan. Through expansion of biofuel the company is contributing to the development of low-carbon marine fuel to support the decarbonization of ocean transport.
Potential of Hydrogen and Biofuels
Industrial gases are used for a wide variety of purposes across industries, including the energy sector, mining, construction, food and beverage production, healthcare, and more. Since they help power modern life, the long-term decarbonization of the sector is critical to global efforts to mitigate the worst impacts of climate change.
- Industrial gases are the gaseous materials that are manufactured for use in industry (nitrogen, oxygen, carbon dioxide, hydrogen, etc.).
- Hydrogen has been identified as having tremendous potential for helping to reduce reliance on fossil fuels. It is light, energy-dense, easily stored, and produces no direct greenhouse gas emissions.
- Hydrogen is featured in the European Union’s scenarios for achieving net-zero emissions by 2050
- Biofuels are renewable alternatives to fossil fuels which have potential to help reduce emissions, particularly in the transport sector, depending on the feedstock used in its production.
- In the IEA Net Zero Scenario, biofuels make up 8% of shipping fuel and 10% of aviation fuel by 2030, up from nearly zero in 2022 (IEA report on renewables).
In conclusion, analyzing and dissecting a portfolio’s carbon footprint isn’t always an easy task, and carbon emissions are not the only indicator investors must consider in a company or portfolio’s ability to contribute to the transition to a low-carbon society. We will continue to monitor the industrial sector and its sub-sectors for further developments, while also supporting companies that take specific steps in helping reduce its own emissions and those throughout its value chains. The path to net zero is a journey, but we recognize that the role we play as an asset manager is a crucial one.
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