The Principles for Responsible Investment (PRI) network launched the Montreal carbon pledge in September 2014, and more than 120 investors worldwide with more than $10 trillion in assets under management (AUM) had joined the pledge as of December 2015. The pledge’s first 10 signatories were the Etablissement du Régime Additionnel de la Fonction Publique (ERAFP), PGGM Investments, Bâtirente, The Joseph Rowntree Charitable Trust, the Environment Agency Pension Fund, CalPERS, Nordea, Calvert Investments, Ownership Capital, and AP4. To sign the pledge is to formally commit to measuring, disclosing, and reducing one’s carbon footprint.
As stated on the Montreal Carbon Pledge website, the formal pledge is as follows:
“As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that there are long-term investment risks associated with greenhouse gas emissions, climate change and carbon regulation.
“In order to better understand, quantify and manage the carbon and climate change related impacts, risks, and opportunities in our investments, it is integral to measure our carbon footprint. Therefore, we commit, as a first step, to measure and disclose the carbon footprint of our investments annually with the aim of using this information to develop an engagement strategy and/or identify and set carbon footprint reduction targets.”
Investors might want to measure their portfolio’s carbon footprint in order to identify key areas for reducing emissions, track progress in making reductions, demonstrate a public commitment to addressing climate change, and address stakeholder concerns about climate change. Also, an investment portfolio may be exposed to risks and presented with opportunities related to climate change, and understanding both could lead to better investment returns. All asset owners and investment managers, regardless of whether they are PRI signatories, may sign the Montreal Carbon Pledge.
A company’s carbon footprint is measured by its emissions of the six greenhouse gases identified by the Kyoto Protocol: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride. The measurement takes into account direct emissions from sources that the company owns or controls and indirect emissions from electricity consumption, waste disposal, fuel extraction and other sources.
A portfolio’s overall carbon footprint is measured by summing the emissions of each company in the portfolio proportional to the amount of its stock that the portfolio contains. Third-party providers can be hired to calculate a portfolio’s carbon footprint. Investment managers can choose for themselves how to act on the information they learn about the portfolio’s carbon footprint. They might choose to reduce their exposure to holdings with a large carbon footprint or to actively invest in companies with low carbon footprints, but they are not required to do so.
Signatories are expected to provide their annual carbon footprint disclosure through their website, annual report, sustainability report, responsible investment report, or other publicly visible client/beneficiary reporting channel. Stakeholders may want to know how signatories view their findings and how they will address them. It is important for signatories to be clear about what they have measured, what progress they have made, what initiatives they have planned and what setbacks they have experienced and to offer stakeholders the opportunity to provide feedback.
Signing up is free and can be done online through a simple form that asks for the company’s name, assets under management, and the percentage of assets that the company will calculate a carbon footprint for. The form also asks whether the company has already set any carbon reduction target and for the name and email address of a contact person.
The Montreal Pledge had an initial goal of getting institutional investors with a total of least $500 billion in assets under management to commit to measuring and disclosing their carbon footprint by the United Nations Climate Change Conference (COP21) in December 2015. The Montreal Pledge’s suggested method for institutional investors to measure and evaluate their portfolio’s carbon footprint is to first build support among colleagues, clients, the board, trustees, investment committees, the chief investment officer (CIO), and portfolio managers. Then, they should choose how much of the portfolio to measure and how often.
For example, an investor might measure the carbon footprint of the equities portion of the portfolio or the part of a portfolio that represents a specific geographic region. The more areas that are measured, the more the investor will learn about the portfolio’s overall carbon footprint. Ideally, these measurements will happen annually, but it depends on the investor’s budget and resources to review and act on the findings.
Another step is choosing who will do the measuring. Portfolio managers might be able to do this, or it might be necessary to hire an outside service provider. Data on carbon footprints can be gathered from the annual reports of companies whose stocks are held within the portfolio or they can be estimated or modeled. Once measurements are available, investment managers need to analyze the data, making sure they understand the measurement methods used and any shortcomings (such as estimated data), then compare the results to a benchmark and decide how to act on it. Actions might include taking steps to lower the portfolio’s carbon footprint, talking with the companies within the portfolio about their carbon footprints, and discussing findings and their implications with the portfolio’s investors.