How to take your investment portfolio carbon neutral
First published in the i newspaper on 24 September 2021
As the climate crisis intensifies, many of us desperately want to take action. The good news is there are many things we can do. We can start small: shop locally, recycle, reduce our meat and dairy consumption. We can go further: ditch the car and long-haul flights. On the financial front, we can open an ethical bank account and invest our savings in sustainable or ‘ESG’ funds.
But whatever we do in our everyday lives, we will still have a carbon footprint and contribute to climate change. It’s the same for investments: even if we choose every investment on the basis of low carbon, our portfolios will still have a carbon impact because the companies we invest in create emissions themselves.
That’s where carbon offsetting comes in. Offsetting is the purchase of carbon credits to rebalance carbon emissions, reducing one’s carbon footprint to zero. Credits are created by a wide variety of activities, such as tree planting, conservation and renewable energy generation.
Can you trust carbon credits?
Carbon credits have a mixed reputation. Many people view them as vital in the fight against climate change, especially credits that finance protection of natural carbon sinks, such as tropical forests. But sceptics view them as ‘indulgences’, fictions that allow people and companies to continue their polluting, business-as-usual activities.
That may be the case in some instances, but plenty of companies are working hard to decarbonise, using offsets to rebalance the remainder of their emissions. In any case, much of the bad press targets poor-quality offsets. Perhaps that wind turbine you’re funding would have been built anyway, or those trees have already been planted several times over. Perhaps you’re not really protecting the rainforest, merely diverting loggers from one area to another.
Many of these concerns are addressed by credit certification programmes, such as the Verified Carbon Standard, and the Climate, Community and Biodiversity Standards. And the Taskforce on Scaling Voluntary Carbon Markets, a major initiative led by Mark Carney, is designing global regulations for the sector.
By purchasing high-quality credits, investors can take control of their impact today. This is particularly relevant when thinking about our investments. The companies we own shares in may or may not be reducing their impact. They may have publicly committed to ‘net zero’ at some time in the future. Most will not have made any net zero commitment at all.
While everyday investors have limited (or no) say in how their portfolio companies are run, offsetting enables investors to contribute positively to the climate in the here-and-now, when it counts. Importantly, offsetting does not let companies off the hook; the pressure remains for them to decarbonise as soon as possible.
Offsetting can help maintain a diversified portfolio
There are, of course, ways for investors to minimise their impact without offsets. Sectors such as technology, financials and healthcare are inherently low carbon, and most constituent companies have a relatively small footprint. However, it's considered prudent for a portfolio to be diversified across different sectors.
There are also good reasons to invest in higher carbon companies. These could be ‘climate solutions’ companies which – as the name suggests – produce solutions to the climate crisis. Examples include manufacturers of solar panels or components for electric cars. They often have a relatively large footprint (factories have high energy costs; inputs are shipped from overseas), but without their products and services, we stand no chance of combating climate change.
There are also higher carbon companies known as ‘transition’. These companies are best-in-class reducers of their own impact, to be emulated by laggards in their industry. Large-scale divestment sends the wrong message to companies that are working hard to decarbonise their operations and value chains.
How much does it cost?
Carbon credits aren’t free. It would be asking too much if the cost of offsetting ate up much of the return on investment, but in most cases it’s a manageable expense.
At Sugi, we’ve looked at a variety of common equity portfolios across the UK retail market. Using average-priced carbon credits, the typical portfolio costs around 0.5% of portfolio value to offset. That’s £50 per year for a £10,000 investment. Greener portfolios tend to come in at about half that. For comparison, the global equity market has returned around 8% a year over the long term, without adjusting for inflation.
So, you want a zero-carbon portfolio?
Investors looking to make greener choices should check the carbon impact of their portfolios and individual investments. If it’s appropriate and in line with other investing objectives, choose lower carbon holdings. (And remember, even choosing green or ESG products does not guarantee low carbon.) For the remaining impact? Seek out verified, high-quality carbon credits from a credible source.
Congratulations: you’re now a carbon-neutral investor.