Measuring the carbon intensity of portfolios – An Explainer

7 min read 16 May 22

We are all increasingly aware of how we have an impact on the planet through the investments we make.

Green House gases are directly correlated to the future temperature of our atmosphere. They comprise of a select number of gases, of which Carbon dioxide is the primary contributor. Other gases are significant such as Methane and the Flurocarbon chain, but these tend to be referred to as ‘Carbon’ or more specifically Carbon dioxide equivalent.

M&G Plc is committed to achieving carbon net zero investment portfolios by 2050, in aggregate, across our total assets under management and assets under administration, to align with the Paris Agreement on Climate Change.

As part of our net zero 2050 investment strategy, we will seek to: identify and invest in climate solutions; engage with investee companies to lay out credible transition plans and targets; and encourage the necessary emissions reductions; and reduce contentious high carbon exposures. We will end our thermal coal-related investments by 2030 across OECD and EU member states, and by 2040 in developing countries. You can read more about M&G’s pathway to net zero here.

As a step on our journey to becoming a fully sustainable business, we have taken the step of publishing carbon intensity data within our regular fund reporting. 

How is M&G measuring carbon intensity?

M&G  has adopted the metric called Weighted Average Carbon Intensity (WACI) to report some funds’ carbon emissions. WACI measures the carbon intensity of businesses rather than total carbon emissions, enabling customers and clients to compare the weighted average carbon efficiency or intensity of a fund with that of its benchmark.

What are the limitations of WACI?

As with any mass data collection, there are methodology limitations. This also applies to MSCI’s WACI data.

For instance, when calculating WACI metrics , MSCI use Scope 1 and 2 carbon emissions, but do not capture Scope 3 emissions, which are harder to measure. 

  • Scope 1 are direct emissions from the activities of an organisation from sources it controls. These would include company vehicles and fuel combustion on site, like gas boilers. 
  • Scope 2 are indirect emissions from the generation of electricity and heat used by an organisation. 
  • Scope 3 emissions are those from all other activities of an organisation from sources it does not control. These would cover all emissions associated with business travel, employee commuting, good or services that are bought or sold, waste disposal and investments. 

WACI does not take into account the difference in carbon characteristics among sectors. This matters because some sectors – especially the likes of construction, energy and industry – are inevitably much more carbon-intensive than the likes of finance and technology.

Another important limitation of WACI is that certain asset classes are excluded from this calculation. Most significantly, these include government bonds, asset-backed securities, cash, foreign currencies and derivatives. This means that the coverage of fixed income funds is likely to be limited.

How does WACI work?

WACI seeks to measure the carbon intensity of businesses, not their total carbon emissions. It is a calculation of the tonnes of CO2 emitted per US$1 million of company sales. It then aggregates them using the percentage weight of the holding within the fund.

The WACI metric therefore normalises for company size – a large global company with large carbon emissions, in absolute terms, may have a lower WACI  than a smaller company that pollutes less, in absolute terms, but is less efficient in its processes.

The WACI metric covers Scope 1 and 2 emissions but does not cover Scope 3. It therefore fails to reflect any positive climate impact an investee company’s products or services may have if they are designed reduce or displace CO2 emitting activity.

Why is WACI useful?

The WACI metric can help us gauge companies’ impact on the planet and also allow us to compare companies against each other, the wider market or a financial benchmark.

Based on the WACI metrics  of companies held within a fund on a given date, a WACI metric  can be generated for that fund according to the weighting of companies in the portfolio.

This enables a comparison of the carbon intensity of a fund – according to WACI – with the carbon intensity of its benchmark, which might be an index for the overall global stockmarket, for instance. The funds’ WACIs are not being managed in line with their benchmarks’ WACIs.

How is M&G using WACI?

M&G Investments is now including WACI metrics  in its fund factsheets, using MSCI data to compare the carbon intensity of its portfolios with those of funds’ respective benchmarks.

We are publishing this metric for all equities, fixed income and multi-asset funds where over 50% of the portfolio’s assets are covered by WACI. We believe this is sufficient to give a fair representation of a fund’s carbon intensity. For information, we are publishing the coverage by portfolio weight alongside WACI data for each fund.

Applying this threshold does mean that funds with less than 50% coverage will not include WACI in their factsheets. This will inevitably include M&G funds that predominantly invest in government bonds and markets with low coverage.

Certain asset classes are excluded from this calculation, including government bonds, asset-backed securities, cash, foreign currencies, derivatives and property.

We are making every effort to check MSCI’s data and are currently building our own tools which will use a variety of data sources to gather and map the carbon emissions of our funds.

How useful are M&G’s WACI metrics  for investors?

It is important that we help investors make informed choices about their investments, and sustainability is rightly an important factor for many of our customers. We believe that publishing WACI metrics, where we meaningfully can for our funds, is a useful step in engaging with the important issue of carbon-intensity.

A fund that holds large allocations to the utilities sector, which has relatively high carbon emissions, is likely to have a higher WACI than a benchmark for the global stockmarket, which only has a small allocation to the utilities sector. A fund that is focused on technology stocks will invariably have a lower WACI by virtue of its sector allocation.

Ultimately, WACI is one indicator that gives a snapshot of a fund’s carbon-intensity at a given moment in time. We hope that, rather than triggering decisions to buy or sell investments, its publication can be a starting point for conversations between clients and us about how our investment teams are managing carbon emissions within the objectives of their fund. We look forward to updating clients on our emissions-related engagements with the companies we invest in.

How will you use this metric if there are no non-financial objectives in my fund?

We believe that well-governed businesses, run in a sustainable way, have the potential to deliver stronger, more resilient investment returns in the long term for shareholders, as well as better outcomes for society. It will also provide additional insight to our Stewardship team who engage with companies and can use this metric to assess a company against its peers.

Why have M&G chosen to use WACI?

WACI is one of many greenhouse gas emissions data points, each offering a different aspect of analysis on climate impact.

M&G Investments have selected this metric as it is applicable to equities, fixed income and multi-asset funds and it is aligned to the recommendations from the Taskforce for Climate Related Financial Disclosures (TCFD). It has also been chosen to align with M&G plc’s group-wide target of transparency when it comes to the disclosure of climate emissions.

We currently use MSCI as our main third-party data provider for carbon intensity data due to the broad coverage they provide.

Please refer to the glossary for an explanation of the investment terms used throughout this article.

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. There is no guarantee that ESG objectives will improve performance.

Investing involves risk, including the loss of principal. Where any performance is mentioned, please note that past performance is not a guide to future performance.

The views expressed in this page should not be taken as a recommendation, advice or forecast.

By M&G Investments

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