This content was originally published on the University of California website.
The total carbon footprint for the $30 billion public equity portfolio of the University of California is 5,595,178 tons of CO2e or 189.5 tons of CO2 per $1 million, according to MSCI analysis. That carbon footprint, as of Aug. 31, 2015, compares to 5,884,270 tCO2e and 199.3 tCO2e/$1M for a portfolio made up of the MSCI world equity index.
As a signatory of the Montreal Carbon Pledge, the Office of the Chief Investment Officer for the University of California took the step of measuring its carbon footprint in order to better understand the carbon risk associated with its equity portfolio. A global owner, UC encourages all corporations to fully disclose their carbon emissions.
MSCI models carbon emissions based on a revenues based approach. For comparison, analysis by consultant South Pole Group estimated total carbon emissions on this portfolio at 4,937,963 tCO2e or 215 tCO2e/$1M financed revenue.
The following charts show these calculations compared to a similar calculation of the MSCI ACWI world index for results from both carbon portfolio analytics firms.
The carbon footprint of an investment portfolio measures the amount of greenhouse gas emissions that publicly traded companies, whose shares are held in the portfolio, emit from their operations. The carbon footprint of UC public equity holdings was measured as of Aug. 31, 2015, and is based on the latest carbon dioxide emissions data for companies' direct emissions (scope 1) and indirect emissions from purchased energy (scope 2). Calculations are made on the UC's portfolio of listed equities, based on weightings of the relative size of equity holdings.
The University of California is a signatory to the Montreal Carbon Pledge. The United Nations-supported Principles for Responsible Investment, with the support of the United Nations Environment Programme Finance Initiative, launched the Montreal Carbon Pledge on Sept. 25, 2014, at the annual PRI in Person conference in Montreal. The Montreal Carbon Pledge initiative asks signatories to measure and disclose the carbon footprint of their investment portfolios on an annual basis as a step towards better understanding and management of climate change-related risks and opportunities.
Carbon footprinting of a portfolio is a greenhouse gas accounting of investments that enables quantification and comparison of the level of carbon-related risks equity investments might be subject to in the future when greenhouse gas emission externalities may be repriced in global markets. Carbon footprint analysis, at its best practice, can help institutional investors evaluate which of the corporations whose equities investors are holding in their portfolios have the highest emissions and therefore may be exposing a portfolio to greater or lesser climate risk.
The completion of carbon footprinting analysis of the UC public equities portfolio for 2015 highlights that the largest holdings in our portfolio are in individual companies known to havelow carbon emissions profiles. Our carbon exposure in the "materials sector" — such as holdings in steel and cement manufacturing in emerging markets — represents the largest long term climate exposure in our portfolio. The UC's opportunistic underweighting of holdings in utilities and energy companies compared to the MSCI World Index (ACWI) contributes to our lower carbon footprint than the universal index.
Carbon footprinting analysis is at an early developmental juncture. Officially reported and audited emissions data for the companies held in our portfolio are incomplete and therefore computer-based modeling of estimates of carbon emissions by industries and by companies are needed to supplement the analysis.
For 2015 the modeling analysis was completed for the UC Office of the Chief Investment Officer by two firms, MSCI and South Pole Group. According to analysis by both firms, only 34 percent of securities in our portfolio are companies that publicly report their carbon emissions. The emissions of the remaining 66 percent of companies in our portfolio were estimated by the firms using multiple estimation methodologies and models. Each modeling approach has its strengths and limitations, creating uncertainties in estimation. To date, no single method is universally accepted within the scientific community. The use of different methodologies is the reason why the estimations by MSCI and South Pole Group exhibit deviations from each other.
The exercise of carbon footprinting does not tell investors how well companies held in the portfolio are transitioning to a low carbon society because future plans and strategies are not measured in this year's carbon footprint tabulation. Transition is based, in larger measure, on the level of investment in climate solutions which is not revealed through a carbon foot-printing assessment.
Finally, the lack of publicly reported corporate greenhouse gas emissions data hinders the ability of investors like the University of California to fully and accurately assess the carbon risk in investment portfolios.
It is the hope of the signatories of the Montreal Carbon Pledge that widespread measurement and disclosure of portfolio carbon footprints among investors will ultimately lead to a greater level of emissions and carbon risk disclosure among publicly listed companies. The UC decision to undertake a portfolio carbon footprint analysis is rooted in its support for the goals of the Montreal Carbon Pledge. Clearly, if a firm is not calculating the carbon emissions from its operations and energy use, then that firm is unable to assess the level of climate risk posed to investors in their businesses. The U.S. Securities and Exchange Commission (SEC) recognized the financial impacts of climate change when it issued Interpretive Guidance on climate disclosure in 2010. The Guidance outlines reporting requirements on "material" regulatory, physical, and indirect risks and opportunities related to climate change. The UC OCIO will continue to study and learn more about the technologies available to report on its carbon risk.