Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
We are all working hard to reduce our carbon footprint to protect the planet for future generations, but making changes can be hard without significantly altering our lifestyles – it is hard to give up your car, or stop exploring the world.
Instead many of us focus on making smaller changes in our lives to make a difference – we may choose to recycle our rubbish, take a shower instead of a bath or even replace the lightbulbs in our house.
What may surprise you is how much you could reduce your greenhouse gas emissions by updating your investment portfolio, given how little effort it takes.
However the idea of a carbon footprint for your investments may feel like an alien concept. We will explain how this is calculated, why switching may make a difference to both the environment and your returns, and how the new AJ Bell Responsible Growth Fund presents a hassle-free way to do this.
Calculating the Carbon Footprint of an Investment
When you invest in a company you buy either shares or its bonds. Either way you are providing funding for the company for its operations. Therefore to calculate your share of the carbon footprint, first we calculate the total footprint of the company, and work out what proportion of the company’s funding you have provided.
So how do you work out the emissions from a company, and where do you draw the line?
For example some emissions are obvious – the airplanes flown by EasyJet produce greenhouse gases that can be calculated fairly easily. On the other hand, an office based company uses electricity to power its computers, or taken to the extreme its employees commute into work, the waste output of these things are harder to calculate.
As such the carbon footprint of most companies is significantly under-reported, only including any emissions it has either directly produced or that were generated through its use of electricity.
This means in reality, your share of emissions is even larger than reported.
Does switching really make a difference?
By switching your investments to a portfolio with lower total emissions, your footprint is seemingly reduced. However the question remains, does this really make a difference? It could be argued that the company you have sold your holdings in will carry on producing the same amount of waste.
Although it will not stop carbon emissions in the short term, switching your investments could have a longer term impact, encouraging companies to focus on reducing their greenhouse gases. If enough people switch their holdings, the share price of the companies with high emissions may fall, creating an incentive to change.
Why going green could make financial sense
However it is not just for environmental reasons why you may want to switch your investments. As part of the 2015 UN Climate Change Conference in Paris, countries agreed to carbon reduction targets. To achieve these reductions many nations are considering ways of encouraging companies to reduce their emissions. One way this could be achieved is through carbon taxes. Much like the sugar tax in the UK, the idea here is a government would charge a levy on emissions above a certain level. If this tax is widely implemented in the future, and if the tax was relatively high to hit the stretching targets, it could significantly reduce the profits of companies with high emissions, hurting their share prices – perhaps another reason to consider a lower carbon portfolio.
How does the Responsible Growth Fund reduce your footprint?
The Responsible Growth fund invests in other funds rather than individual companies. These operate by selecting investments based on a set of rules. Most of these will use a very simple set of rules, such as investing in the largest companies in different regions or sectors. However a new breed of funds have developed over the last few years that allow you to take a responsible approach to investing. Some of the different ways rules are applied to the products used in the fund that help to reduce the carbon footprint include:
- Exclude companies that generate significant revenues from high emission business areas such as thermal coal or certain oil & gas extraction activities
- Exclude the companies with the highest carbon output
- Only include companies with good environmental, social or governance scores
At the same time the fund still invests across different sectors and regions, to ensure all our eggs aren’t in one basket. This may mean that we still invest in some companies that have high emissions individually, but compared to a portfolio that invests in global equities, based on size alone the footprint of the fund is significantly lower*. Based on the estimated carbon emissions, the reduction is around 40%. But what does this mean?
Switching £10k provides the same benefits as:
- The carbon dioxide reduction of planting 6 trees over a 10 year period
- Changing 14 incandescent light bulbs to LED
- Recycling 15 bags of rubbish rather than sending them to the landfill
Of course the bigger the investment amount, the bigger the difference – on an ongoing basis a £20k investment is estimated to be the same emissions reduction as going vegetarian, and for someone with a bigger retirement pot of £125k, the saving is equivalent to giving up your car!Find out more about the AJ Bell Responsible Growth fund
* Data based on MSCI carbon output estimates – a £10k investment results in a 0.36 metric tonne reduction of carbon dioxide emissions per annum compared to investing in the MSCI ACWI index, the carbon dioxide emission equivalents are sourced from reputed sources.