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Carbon-Intensive Mutual Funds to Become Big Losers: Report

The carbon footprints of the nation’s largest mutual funds vary wildly, with the fund with the biggest footprint 38 times more carbon-intensive than the fund with the slimmest footprint.

Environmental research firm Trucost hopes the results of its just-released report “Carbon Counts USA” will close the gap now that fund managers can access the data to measure financial risk exposure from future carbon constraints, such as climate change legislation and a greenhouse gas cap-and-trade program. The company ranked the country’s 91 largest mutual funds, with holdings worth $1.55 trillion, based on their carbon footprints.

“The data hasn’t been available before, so in a sense, they’ve been flying blind,” Simon Thomas, Trucost’s chief executive, said during a conference call Wednesday.

Mutual funds with large carbon footprints will likely become big losers in a carbon-constrained economy because a price on emissions will increase operating costs for companies with intensive fuel sources and processes. Most, if not all, companies will see their energy costs grow. Funds with the smallest footprints are will be impacted the least.

Carbon-intensive funds like the Fidelity Capital Appreciation Fund, for example, could be subject to costs of nearly $125 million, or 3.32 percent of revenue, if the price of carbon is factored in, Trucost said. The company used a cost of $28.24 per metric ton as the basis for this calculation.

In comparison, the most carbon-efficient fund, the Financial Select Sector SPDR Fund, would be subject to $8.3 million in carbon costs under the same scenario.

There is no correlation between carbon footprint and performance, Trucost said. Rather, such a correlation won't materialize until a global carbon market is put in place.

The study analyzed the funds based on eight investment styles: core, growth, value, index, country/regional, equity income, sector and sustainability/Socially Responsible Investment funds. As a whole, the portfolios of the 91 funds generate about 615 million metric tons of greenhouse gas emissions.

The carbon footprint of the combined 91 funds measured in at 335 tons of carbon dioxide per million dollars of revenue. The carbon footprints of the S&P 500 and MSCI Europe funds were virtually identical: 384 and 383 tons of emissions per million dollars of revenue.

Surprisingly, the Sentinel Sustainable Core Opportunities Fund -- an SRI fund -- had the fourth largest carbon footprint of the funds analyzed, with 692 tons of carbon dioxide equivalent produced per million dollars of revenue. Overall, however, the aggregated SRI funds had portfolios that produced just 226 tons of emissions per million dollars of revenue.

The top five most carbon-efficient funds don’t invest in the utilities and oil and gas sectors. Instead their holdings are concentrated in lower-carbon financial services, banks and health care. Trucost declined to publish the full rankings of all 91 funds but said it may do so in the future.
The most carbon-efficient funds are:
  1. Financial Select Sector SPDR Fund -- 40 tons of CO2 equivalent (tCO2e) per million dollars in revenue
  2. Vanguard Health Care Fund -- 48
  3. PowerShares QQQ Trust  -- 69
  4. Ariel Appreciation Fund -- 98
  5. Oppenheimer Global Fund -- 111
The most carbon-intensive funds are:
  1. iShares FTSE/Xinhua China 25 Index Fund -- 1,549 tCO2e per million dollars in revenue
  2. Fidelity Capital Appreciation Fund -- 758
  3. Janus Fund -- 744
  4. Sentinel Sustainable Core Opportunities Fund -- 692
  5. Energy Select Sector SPDR Fund -- 613
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