The Carbon Footprint of Capital Investments - adelphi

006 adelphi • The Carbon Footprint of Capital Investments adelphi • The Carbon Footprint of Capital Investments
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3 Financed emissions – the product carbon
footprint of capital investments
German investors: According to a representative
survey by the Climate Change Financial Forum
(Finanz-Forum Klimawandel), 43 % of German
fund investors would like to incorporate climate
protection aspects into their investment portfolios
(Finanz-Forum Klimawandel 2010). Most of the
market experts polled by Strandberg estimate
that up to 60 % of private clients are a potential
target group for sustainable and climatefriendly
financial investments (Strandberg 2005,
p. 25 f.). The clients in question are for the most
part highly educated and wealthy people.
There are, however, major obstacles to private
investments owing to the still inadequate
advice available to investors and the low level
of awareness among consumers about such
investment forms. Only 14 % of fund investors
consider themselves well informed about climatefriendly
products. 74 % of investors call for more
transparency about the products (Finanz-Forum
Klimawandel 2010). The quality of advice available
in relation to socially and ecologically sustainable
financial investments in Germany is also still
greatly in need of improvement. 5 According to a
Mystery Shopping study conducted in 2003, the
quality of investment advice given in respect of
these product groups is classed as inadequate.
In other words: Sustainability funds were often
mistakenly judged by advisors as being "risky" and
"exotic", and consequently "were recommended
only with reservations, and if expressly wished
by the clients" (imug 2003, p. 58). In the Mystery
Shopping test, no financial advisor offered
sustainable capital investment products on his or
her own initiative.
In fact, climate-friendly capital investment
products can be highly attractive for many private
investors. Climate-friendly financial products
enable investors to attain multiple goals with one
investment (Beal/Goyen/Philips 2005). They can
represent an attractive option financially, thanks
to their promising growth prospects. Enterprises
committed to climate protection frequently also
offer strong sales growth prospects and are
exposed to lower risk from rising energy and
commodity prices. This means that integrating
climate-friendly investments into a portfolio
is a profitable long-term strategy (Deutsche
Bank Research 2010). Above and beyond the
financial opportunities offered by climate-friendly
capital investments, investors can also achieve
non-financial goals. Climate-friendly capital
investments enable private investors to cut their
contribution to global greenhouse gas emissions
and thereby reduce their personal carbon footprint.
At the same time, with such an investment strategy
they can actively promote climate protection by
incentivising businesses to incorporate climate
protection considerations more strongly into
their corporate policy. 6 Climate-friendly capital
investments thus offer a major advantage over
conventional products – an advantage which can
be easily communicated by financial advisors.
In this context, the "product carbon footprint"
of capital investment products can serve as a
key instrument in presenting climate-friendly
financial products in a more transparent and
understandable way. It can enhance the advice
given to clients regarding climate-friendly
financial investment products and improve
communication of their characteristic features to
private investors, as well as winning new clients
for this form of capital investment.
While there are many instruments to measure the
financial performance of conventional investment
products, there are as yet few means of measuring
extra-financial performance. All clients have to
go on at present with standardised financial key
performance indicators, which give no indication
as to whether their investment strategy will also
achieve extra-financial goals, such as reducing
greenhouse gas emissions (Pictet 2008, p. 8 ff.).
Calculation of the product carbon footprint
of capital investment products can create
transparency on the market and satisfy the
information needs of interested investors. The
product carbon footprint originates from the
concept of the ecological footprint (Wackernagel /
Rees 1996) which has become very popular within
the framework of the climate debate over recent
years. The product carbon footprint indicates the
greenhouse gas emissions of goods or services.
It depicts the emissions throughout the supply
chain, from production to distribution, though it
may also encompass use, disposal and recycling
(ISA UK 2007). Consumers can thus be provided
with a transparent picture of the impact on the
earth's climate of the products they consume.
This offers them the possibility to incorporate the
product's emissions as decision-making criterion
when choosing which products to buy. The product
carbon footprint can ultimately serve as a guide to
responsible consumer behaviour.
No internationally recognised standard currently
exists for determining the product carbon
footprint. A large number of initiatives are,
however, campaigning for government or privatesector
product marking to be introduced. The basis
of all product-related greenhouse gas emission
assessments is the eco-balance according to
the ISO standard 14040 (ISO 14040 ff.). It is very
generalised, however, and in practice the different
methods applied frequently produce results which
are difficult to compare (Öko-Institut 2009). 7
The greenhouse gas emissions of businesses
are mainly recorded in accordance with the
internationally recognised reporting standard
of the GHG Protocol (WRI/WBCSD 2004). For
production emissions (Scope 1) and indirect
emissions, such as due to electricity purchasing
(Scope 2), this standard and the data collection
methodology applied by the companies concerned
are relatively well developed, whereas for
emissions arising from the rest of the value
creation chain (Scope 3) there is an urgent need
for more development. These Scope 3 emissions
are only recorded by a minority of companies.
Consequently, in early 2010 the World Business
Council for Sustainable Development (WBCSD)
and the World Resource Institute (WRI) initiated
two new provisional standards: the "Product Life
Cycle Accounting and Reporting Standard" and the
"Scope 3 (Corporate Value Chain) Accounting and
Reporting Standard" (WRI/WBCSD 2009a), which
are currently undergoing testing by 60 members
of the WBCSD and are scheduled to be presented
in final versions in late 2010 (WRI/WBCSD 2009b).
No German company is so far participating in
this project however, and internationally only one
financial services provider – Bank of America – is
represented.
Financial services providers and society at large
are mostly agreed that both investors and finance
recipients are responsible for the social and
ecological effects of the financed projects and
enterprises. There are consequently a number of
initiatives in the financial sector which are already
committed to more concerted consideration of
such factors in the investment decision-making
of financial services providers. As part of that
commitment, the world's largest project financing
entities signed up to the Equator Principles (2006),
whereby they undertake to consider sustainability
criteria in respect of projects with capital costs
exceeding 10 million US dollars which may have
significant ecological and social impact. Beyond
that commitment, too, widespread efforts are
being made by financial services providers
worldwide to positively influence the social and
ecological effects of capital funding provided.
5
A survey among bank staff and customers on the German market confirms this result. It found: "Bank advisors have to date been left alone
by their bosses to deal with the issue [climate change] and to come up with product solutions" (Lord/Bub/Ramspeck 2007, p. 54).
6
The correlation between capital investment and active climate protection by companies is dealt with in detail in the study "Climate Protection
through Capital Investments. Effects of climate and sustainability funds on German stock corporations" (Kahlenborn et al. 2010).
7
The
most influential standard at present is the UK's Publicly Available Specification 2050 (PAS 2050) which is likewise based on ISO 14040 but
also differs from it widely in some points.