By Heidi Soumerai
From the Winter 2014 Edition of Values

As increasing numbers of investors seek verification that their portfolio managers are considering climate change risk in investment decisions and company engagement, analytic tools are evolving that assess the carbon exposure embedded in portfolios. Walden recently had two leaders in carbon footprint analysis, Trucost and South Pole Carbon, evaluate a representative Walden core equity portfolio (as of August 31, 2014).

First, some words of caution. While Walden recognizes the usefulness of independent verification of portfolio carbon risk, the existing tools have significant limitations. For example, carbon footprint assessment methodologies struggle to capture the positive or negative impacts associated with the use of products (see following Praxair example). Methodologies focus on carbon emissions from operations and energy use, yet these are often the smaller portion of a company’s greenhouse gas emissions from a life-cycle perspective. Additionally, quantitative assessments do not account for shareholder engagement that aims to strengthen sustainable business practices and corporate accountability over time. Still, we believe the tools provide a helpful perspective in assessing how Walden core equity portfolios compare to their primary benchmark, the S&P 500, and to other investment managers.

Using $36 as the average annual price per ton of carbon emissions, Trucost calculates a market-weighted, total portfolio carbon footprint (carbon emissions per unit of revenue) using direct emissions from company operations as well as first-tier supply chain impacts such as electricity, business travel, and logistics. The Walden core equity portfolio was evaluated to be 51 percent less carbon intensive than the S&P 500 benchmark or, put differently, the benchmark had twice the carbon footprint. More than 90 percent of the favorable result was due to decisions related to sector allocation, and the balance was attributed to stock selection. Our decision to underweight utilities in client portfolios, for financial and ESG reasons, explained most of the result. Industrial gas manufacturer Praxair accounted for 9.5 percent of the portfolio’s carbon footprint, more than the few energy companies in the portfolio. While Praxair has a sizeable greenhouse gas footprint, its business model enables other companies to reduce their emissions. By Praxair’s estimate, the company enables emission reductions that are double its own footprint.

The South Pole Carbon footprint assessment, through a partnership with Your SRI, produced similar results in terms of sector attribution (lack of exposure to utilities had the greatest positive impact) and individual company contributions. This time, however, Praxair was the second largest company contributor, just behind ConocoPhillips which accounted for nearly 20 percent of the portfolio’s carbon footprint. Walden has a long history of constructive engagement with ConocoPhillips on environmental impacts and indigenous rights, and the company recently announced its first greenhouse gas emission reduction goal. Overall, this analysis ranked the Walden portfolio at the 95 percentile on carbon performance relative to all the funds in their universe. The two carbon footprint evaluations suggest that Walden core equity portfolios are well positioned with respect to climate risk, but we look forward to continued fine tuning of these and other measurement tools.