Reducing Carbon Risk In Institutional Portfolios

Why reducing portfolio carbon matters / How one large pension fund is accomplishing this at modest cost

When the world’s largest mining company declares “we recognise global climate change science, as laid out by the United Nations Intergovernmental Panel on Climate Change” 1, it becomes hard to argue that climate change has not reached mainstream science.

This explains why, across the globe, investors are finding it in their best interest to integrate climate risk within their investment considerations.

Investors are joined by regulators, calling for institutional investors to integrate climate change as a fiduciary duty. For example, the US Department of Labor pension guidance has progressed from a 1998 statement allowing that pension plan sponsors 'could' integrate Environment, Social, and Governance factors, to stating in 2015 that plan fiduciaries 'should' integrate ESG factors – that is, a shift from permissible to required, albeit with little indication as to how one should accomplish this.

A series of issues arises – How do we define and measure ESG factors? Perhaps the most topical metric today is greenhouse gas emissions. Yet, while we can measure a company's emissions, how do we measure the emissions 1 Glencore,, retrieved on March 7th 2019. 2 See results under 'Case Study' section. of its suppliers? And do we measure emissions created by a company's products after they leave its control, when they are used by the consumer? How do we translate this into a portfolio metric?

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