Our approach to ESG
Background
One of our clients is a Trust whose goals include an environmental mission to ‘mend the world’. One dimension of this is to understand the carbon impact of the Trust’s activities and take positive steps to reduce it, including through nature recovery and biodiversity.
Artorius first introduced the client to our Specialist Environmental Advisor, Rupert Edwards. Rupert is an advisor to two US-based conservation organisations: Forest Trends and the Environmental Defense Fund; he has consulted for the World Bank and Vivid Economics; and has provided expert advice to the OECD, United Nations, US and UK governments, and various other governments around the world.
Artorius then arranged for the carbon impact of the Trust’s investment portfolios to be checked via our partner Sugi.
Sugi is an independent green fintech that provides personalised information about the environmental impact of investments and offers high-quality carbon offsets for investors to achieve carbon neutral investing.
Here’s what happened…
Trustee meeting with Rupert Edwards
A Trustees' meeting with Rupert Edwards led to a broad-ranging discussion. A particularly interesting takeaway was Rupert’s view of divestment.
For investors concerned about their carbon impact, a common approach is to divest from carbon-intensive holdings. After all, this enables an investor to reduce their own carbon impact immediately. However, while this may deliver results for the investor, it doesn’t affect the overall carbon position – since there’s a buyer in the stock market for every seller and the price will only be marginally depressed by this action, if at all.
Furthermore, much of the capital and impetus required for energy transition towards renewables will come from companies (like the oil majors) that are currently highly carbon intensive. This is likely to happen more quickly if responsible investors engage with these companies, using their influence and votes to shape the outcome, rather than washing their hands of the problem.
Much better than divestment, Rupert suggested, was to quantify the carbon impact of an investment portfolio and consider offsetting it through effective projects, in particular those which prevent deforestation (rather than plant new trees) and are verified to the highest environmental standards. He has visited one of Sugi's partner projects in the Peruvian Amazon, which protects around 600,000 hectares of threatened rainforest) and is certified by the CCBA (Climate, Community and Biodiversity Alliance) to its Gold standard.
Sugi’s portfolio analysis
The Trust’s portfolio is split 50/50 between an Artorius Discretionary portfolio (with ESG constraints) and a total return fund (the ‘Fund') from another firm. This solution is based on the client’s strong desire for capital preservation.
Sugi’s analysis of the combined portfolio showed that around 60% of the carbon impact of the overall portfolio came from the Fund, where equities were around 39% of the portfolio (as opposed to around 50% of the Artorius portfolio). The Fund had a heavy allocation to carbon-intensive Energy and Resources and their policy is to engage with such companies whenever they deem it appropriate.
The estimated cost of offsetting the carbon footprint of the entire portfolio is around 0.4%.
The Fund’s manager and Sugi compare notes
The Fund’s own estimation of their carbon impact was substantially lower than Sugi’s. When the Fund manager, Sugi and Rupert Edwards compared notes, there were two main differences:
The Fund only measures Scope 1 & 2 emissions (the emissions a company creates when it produces things and the emissions from its electricity providers) while Sugi’s data incorporates Scope 3 emissions (the emissions from all of a company’s suppliers and the eventual users of its products), which can be material; and
The Fund does not quantify emissions associated with fixed income, which means its carbon analysis only covers about 11% of the fund. Sugi’s analysis (which includes fixed income) covers more than 80%.
Artorius’ view is that Scope 3 emissions should be included when calculating carbon impact. To exclude them means that oil and gas producers would not be accountable for the carbon that their product would eventually produce. Likewise, equity and fixed income should both be included in the calculations, so that the financing of carbon production by lending is accountable in the same way as equity finance. The public sector is an important contributor to carbon emissions, so sovereign debt should be considered alongside corporate debt.
Next steps for a positive impact
The Trustees intend to make some investments for positive impact. Once they can quantify these positive measures, Sugi’s analysis will form the basis for evaluating the Trust’s ‘net’ carbon impact. The Trustees will then consider offsetting this with carbon credits. Rupert Edwards will help them quantify the positive impact of their efforts.
In the meantime, Rupert provides below some rough calculations to help make the comparison with the cost of carbon offsets. Ignoring that it takes 50 years for the woodland to start sequestering at its maximum rate, Rupert estimates that you would have to plant five hectares of woodland every year (at a cost of around £10,000 per hectare) per £1 million of portfolio value. This would be more than ten times the cost of carbon offsets in the example above.
To read some relevant information on the Woodland Carbon Code, click here.
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Initial conclusions
Introducing Rupert Edwards and Sugi to the Trustees, has enabled them to measure, in a comprehensive manner, the carbon footprint of their portfolios, managed by different investment managers (the Fund’s manager and Artorius). The Trustees are now much better informed to move forward in line with the Trust’s environmental objectives, including the steps required to offset the carbon footprint while not affecting the investment integrity of their portfolios.
Important Information
Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document. The services provided by Sugi and our Specialist Environmental Advisor, Rupert Edwards, are not regulated by the Financial Conduct Authority.
Artorius is a trading name of Artorius Wealth Management Limited. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority.
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