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06 May 2021

Climate mitigation in charity investment portfolios

Nicola Toyer

Nicola Toyer

Head of Charities

How can charities manage and improve their carbon footprint when investing?

To meet the UN goal of reaching net zero carbon emissions by 2050, every individual, company, organisation, or government has a role to play. At Investec, our charity clients are increasingly recognising their need to take action, to manage and improve the carbon footprint of their operations.

 

As a Charities Team, our role is to help our clients understand their options and make progress towards carbon neutrality with regards to their investment portfolios. In our recent webinar, ‘Charities taking action in a net zero world’, we discussed the issues at hand and what steps can be taken.

A journey to net zero

A reminder that we give to all clients is that reaching net zero is a journey, not a single step. The scale of the problem globally is mammoth and will take a huge, concerted effort to overcome.

In terms of your investments, what this means is that targeting a net zero emissions portfolio tomorrow may not be realistic or even rational. There are underlying factors far more complex than they first appear.

The challenge of measurement

We are all aware that the globe’s biggest polluters are coal, oil, and gas. These companies are responsible for the majority of CO2 emissions, with a combined output of close to 35 billion tonnes per year.

However, once you move outside of the realm of the worst polluting companies, measuring the impact of a company’s carbon footprint becomes more complicated. Take a company such as Unilever, a consumer good company that is ranked incredibly highly for sustainability and is committed to decarbonising by 2030. It is comparatively easy for the company to do so, by cutting direct emissions (e.g. resulting from the manufacturing process) and indirect emissions (e.g. heating and lighting of offices).

But this isn’t the full picture of the company’s carbon footprint. If we also consider the emissions that result from consumer use of Unilever products, e.g. using washing tablets in a machine run on electricity, the true impact is much larger - and much harder to measure.

The downside of divestment

While measurement is a complex issue, there is no doubt that the carbon emissions of your portfolio would fall dramatically if you were to divest from oil and gas, and potentially coal.

Many charities take a moral stance on this issue and adopt an exclusionary policy. This has undeniable financial implications. The energy sector in the UK is worth 8% of the FTSE 100 and those who exclude it are missing out on short-term returns as a result.

But there are other, more significant drawbacks. Divestment from these companies does not remove the problem, it simply places it in someone else’s hands. Only by investing in the sector can we have an active voice, through voting rights and a direct dialogue between fund managers and these companies. Those who want to drive change must take a step towards the problem and not away from it.

Practical steps charities can take

The nuanced nature of these issues means that there is no ‘one size fits all’ solution for charity investment portfolios and there is room for different perspectives. But there are some steps that all charities can consider.

1. Measuring emissions

Though we’ve noted the difficulty with measurement, it is generally true that something must be monitored to be controlled. The first step any charity should take is to ask for reporting on the carbon footprint of its portfolio, and which companies within it are at fault. They can then measure the potential requirement or impact of adopting an exclusionary policy.

2. Considering CDP scores

The Carbon Disclosure Project encourages companies to disclose their sustainability statistics and take action to improve them. Charities wishing to avoid excluding a certain sector can use CDP-assigned grades (A, B, C, etc.) to identify the best-performing companies within that sector.

3. SDG alignment

The UN Sustainable Development Goals are 17 targets designed to help us move towards a better world. Aligning your investment portfolio with one or more of the SDGs (e.g. ‘no poverty’ or ‘sustainable cities and communities’) that are relevant to your charity can provide alternative criteria for investment.

4. Positive impact investing


Finally, charities can choose to direct capital towards companies and sectors that have a net positive impact on the world, such as alternative energy sources, waste management or even vegan meat producers. Again, this requires a tailored approach, but an investment manager can help you to identify those that would be appropriate for your organisation.

At Investec, we regularly construct and manage bespoke portfolios for charity clients that align with the specific needs and goals of the organisation, based on this four-point framework. For charities looking to work towards a net zero investment portfolio, this provides a good starting point for that challenging but crucial journey.

About the author

To contact or read more about Nicola Toyer, visit her bio here.

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Nicola Toyer

Head of Charities

To speak to a specialist about how we can manage your charity’s investments, please contact your local Investec experts in the Charities team today.