Insights
ELI5 (explain it like I’m 5): Carbon emissions & water use
How do you measure carbon emissions?
To understand and report on our efforts to reduce global warming, the Earth’s temperature changes must be accurately measured to track if it’s going up, down, or staying the same. This means the actions that emit greenhouse gases need to be measured, as these are the ones that form a layer around the earth trapping the heat inside and contributing to rising temperatures.
There isn’t just one gas that creates a ‘greenhouse effect.’ For example, over a 100-year time horizon, methane has a global warming potential of 25-30 times that of carbon dioxide (CO2). To simplify this, scientists have come up with the Carbon Dioxide Equivalent (CO2e) which is a measure of emissions. CO2e expresses the degree of warming of each gas in terms of how much carbon dioxide would create the same amount of warming. Basically, it's math that turns all gases into carbon dioxide for the purpose of comparing apples with apples. This way we’re dealing with one standard measure. If the world produced less CO2e there would be a smaller layer of greenhouse gases around the earth and less heat trapped inside the atmosphere. Therefore, lower CO2e (carbon emissions) = lower degree of global warming, which is better for the planet.
What we can measure, as fund managers
We know the carbon emissions of (most of) the companies that we hold shares in, so we have some understanding of the impact on the climate from our investment portfolio. To know whether these emissions are excessive or low we use an intensity measure attributed to the listed companies held in each of our funds. This measure is called ’Weighted Average Carbon Intensity’ or WACI for short. WACI is calculated by dividing a company’s annual carbon emissions by its annual revenue and then multiplying it by the weight of the listed company holding in our fund.
What does this tell us? Simply put, this says, that if we held two companies equally, that if one of these companies has high revenue and high carbon emissions, they are not being as carbon efficient as a company with the same revenue and lower carbon emissions. The first company would have a higher WACI value, the second company would have a lower WACI value.
If a company meets all of our other ethical and investment criteria, and has a lower WACI value, it’s a more compelling investment.
We add all of the company-level WACI values together to have a full view of the weighted average carbon intensity of each of our funds – which tells us how ‘carbon efficient’ we are in comparison to the yardstick.
What we cannot measure, as fund managers
Using our current method, we are only able to accurately report on the carbon emissions of listed equities in our portfolios. Listed equities are shares in companies listed on a stock exchange (so no bonds, no cash and no private assets).
Private assets (companies we invest in that aren’t listed on a stock exchange) definitely create carbon emissions. But unfortunately, we aren’t provided data on how big, or small, their total emissions are*. Similarly, it's difficult for us to report on the carbon emissions associated with the bonds we hold in our portfolio. The best way to understand why we can’t give you the full picture (meaning, why we don't report on all the carbon emitted in our funds) is by way of an example.
Imagine a company wants to build an electric rail transport system to replace a fossil fuel one. We’ll call the company “Better Future”. This company has shareholders, but they want to leverage with financing to fund the electric rail project, so they decided to issue bonds. People can lend money to Better Future by purchasing these bonds and these investors will get that money back plus a return on their initial investment after the rail project is completed and (hopefully) generating revenue.
In this example we have: Shareholders in the company called Better Future, the bond issuer (Better Future) and purchasers of the bond (investors). So, who ‘owns’ the carbon that the rail project will emit? The shareholders in Better Future. They ‘own’ the carbon – the carbon emissions for the project are attributed to them.
This is why investors, such as Pathfinder, who invest in bonds that fund projects which can, and do, emit carbon, aren’t considered the ‘owners’ of the carbon.
This also means we aren’t privy to the exact carbon emission data associated with our bond investments, so we don't include them in our carbon calculations.
Okay, so that’s carbon, but what about Weighted Average Water Intensity?
We know the water withdrawal, or ‘use’, of (most of) the companies that we hold shares in, so we have some understanding of the impact on the water supply from our investment portfolio. To know whether water withdrawal is excessive or low we use an intensity measure attributed to the listed companies held in each of our funds. This measure is called ’Weighted Average Water (withdrawal) Intensity’ or WAWI for short. WAWI is calculated by dividing a company’s annual water withdrawn (m3) by its annual revenue and then multiplying it by the weight of the listed company holding in our fund.
What does this tell us? Simply put, this says, if we held two companies equally, that if one of these companies has high revenue and high water use, they are not being as water efficient as a company with the same revenue and lower water use. The first company would have a higher WAWI value, the second company would have a lower WAWI value.
If a company meets all of our other ethical and investment criteria, and has a lower WAWI value, it’s a more compelling investment.
We add all of the company-level WAWI values together to have a full view of the weighted average water intensity of our Global Water Fund – which tells us how ‘water efficient’ we are in comparison to the yardstick.
To view the WACI and WAWI (where applicable) of our funds and other ethical metrics we use to assess the environmental and social impact of our portfolios, check out our Ethical Scorecards in the Investor Documents section for each fund.
*this is normally because private companies we invest in are small, and not required to disclose their carbon emissions, which means they don’t track them. Part of our future engagement strategy could be working with these companies on disclosure.
Financed Emissions - The Global GHG Accounting and Reporting Standard
