State of Green Business

New Report Ranks Carbon Footprints of Leading U.K. Investment Funds

New Report Ranks Carbon Footprints of Leading U.K. Investment Funds

Trucost, the environmental research company which produced the environmental reporting guidelines for business for the U.K. government, has released the first Trucost Carbon Footprint Ranking of U.K. Investment Funds, enabling investors to compare investment funds on an environmental basis.

The report ranks the carbon intensity of 44 main U.K. investment and mutual funds, revealing the best and worst performers in terms of their carbon footprint. The funds amount to approximately £45bn, and are managed by 28 different fund managers.

The Trucost Carbon Footprint Ranking of U.K. Investment Funds will be produced every six months to allow investors to see how different funds are managing their carbon risk.

Key highlights from the Trucost ranking are:
  • There is a massive range in performance between the best and worst: the worst fund has a footprint more than five times larger than the best.

  • The impact of moving a £10,000 investment from the worst fund to the best is 14 metric tons of CO2 emissions per annum. The average U.K. household emits six tons of CO2 per year.

  • There is no gain in financial performance from ignoring the environment -- funds with larger carbon footprints do not produce higher returns.

  • Some SRI funds have larger Carbon Footprints than many mainstream funds.

  • The top performer is Scottish Widows IP U.K. & Income ICVC, Environmental Investor; the worst performer is AXA U.K. Investment Company ICVC -- U.K. Equity Income Fund.

  • The worst SRI fund performer is Old Mutual Investment Company -- Old Mutual Ethical Fund with a Carbon Footprint over twice as large as the best mainstream fund Lazard Investment Funds -- U.K. Alpha Fund.
To produce the rankings, Trucost studied SRI and mainstream investment funds, both active and tracker funds with over 80% of their portfolios invested in the U.K., and calculated the greenhouse gas emissions for which these companies were responsible. The emissions were then converted to carbon dioxide equivalents (C02e) based on 'Global Warming Potential' factors. The total CO2e emissions attributed to each fund were calculated based on the percentage holdings of each stock in the fund and their corresponding emissions. In order to compare the results, the CO2e emissions of each fund are divided by the size of the fund (£mn) to give a Carbon Footprint allowing valuable comparisons with other funds.

Overall the holdings of the 44 funds researched are responsible for carbon emissions of over 50 million metric tons a year. Based on the current price of European carbon emission permits of €21.80 per metric ton the cost of credits purchased to cover these emissions would be over £7 billion a year.

The Results

The results of Trucost's analysis show a massive variation in performance. The best performing fund, with the smallest carbon footprint, was the Scottish Widow IP U.K. & Income ICVC, Environmental Investor. The second fund was Scottish Widow Ethical. Norwich Union Sustainable Future ICVC -- U.K. Growth Fund is in third place. Surprisingly Lazard U.K. Alpha Fund, a mainstream fund appears fourth in the rankings above most of the SRI funds. The fund with the largest carbon footprint is the AXA U.K. Investment Company ICVC -- U.K. Equity Income Fund which is responsible for over five times as much carbon per pound invested as the Scottish Widows fund - 1719 metric tons per £mn invested.

Second of the active mainstream funds was the Aberforth Smaller Companies Trust, with the third lowest carbon footprint achieved by Schroder U.K. Alpha Plus Fund and Equator Investment Funds ICVC -- U.K. Equity Fund in fourth place.

The carbon footprints of the FTSE indexes were also measured. FTSE All Share has a carbon footprint of 1133 metric tons/£mn whilst the FSTE350 was 1138 metric tons. Tracker funds closely matched the carbon intensity of the indexes.

Trucost’s research shows that there is no gain in financial performance from ignoring the environment.

"[I]nvestors can evaluate how well an investment fund is managing its carbon emission risk," said Simon Thomas, chief executive of Trucost. "The results show that funds with larger carbon footprints do not produce higher returns; that SRI funds do not necessarily lead to environmentally sound investment. Investors should look at what fund managers actually do with respect to the environment, not what they say."