April 15th, 2009
Do Your Mutual Funds Have A High Carbon Footprint?
Stumble it!
It’s mid-late 2009, Friday afternoon. The Dow has crept above 9,000 for the first time in months, businesses are beginning to hire, and consumers are starting to consume again (we hope without using too much credit). On Monday morning, President Obama holds a press conference and announces a nationwide cap-and-trade system. Market panic! The Dow drops 500 points and Fox News launches into a 24 hour-a-day war room broadcast, spittle flying against camera lenses throughout. We sit back and smile … finally! Long-term, this is what we need to kick-start the next great American growth industry. If only I’d known what carbon-efficient companies or funds to invest in several months earlier …
Lucky for us, the folks at UK financial data firm Trucost have just released a study (free registration required) that estimates the carbon footprints of 91 large US mutual funds. What is the carbon footprint of a mutual fund, you might ask? It’s basically a sum of the carbon footprints of the individual companies that comprise the mutual fund (per million dollars of revenue), weighted by the fund’s holding in that company. There aren’t that many companies out there that report their carbon footprints yet, so Trucost has developed a sophisticated model (explained in the Appendix to their report) to estimate carbon footprints based on other factors.
So why should a fund’s carbon footprint matter? If you’re like me, then you might choose a fund just because it has a lower carbon fooprint (thereby rewarding the fund manager and the companies in the fund), all other performance metrics being equal. However, we’re heading into a world where there will be a cost assigned to carbon emissions. This cost will hurt companies and mutual funds with high emissions the most. According to Trucost, the portfolio companies of the top-performing fund in their survey would only see a 0.1% revenue decline in a carbon-capped world, while some of the poorer performing funds could see as high as a 3%+ revenue decline. That will definitely take a bite out of fund performance!
Although the report doesn’t display the carbon footprints of each of the 91 different funds (I suspect you have to pay big bucks for that!), there are some pretty useful stats nonetheless:
Carbon Footprint of the S&P 500: 384 tons CO2 / $ million of revenue
Five Funds With The Lowest Carbon Footprints (all in tons CO2 / $ million of revenue):
- Financial Select Sector SPDR Fund (XLF): 40
- Vanguard Health Care Fund (VGHCX): 48
- PowerShares QQQ Trust (QQQQ): 69
- Ariel Appreciation Fund (CAAPX): 98
- Oppenheimer Global Fund (OPPAX): 111
Five Funds With the Highest Carbon Footprint (all in tons CO2 / $ million revenue):
- Energy Select Sector SPDR Fund (XLE): 613
- Sentinel Sustainable Core Opportunities Fund (MYPVX): 692
- Janus Fund (JANSX): 744
- Fidelity Capital Appreciation Fund (FDCAX): 758
- iShares FTSE/Xinhua China 25 Index Fund (FXI): 1,549
Trucost also does an interesting job of calling out sector-specific performance across funds. Socially responsible funds (SRI funds) had the lowest aggregate carbon footprint (226 tons / $ million revenue), while country-specific / regional funds had the highest (460 tons / $ million revenue).
Even within a sector, though, performance can vary greatly. Take the SRI category, for example. Of the 16 SRI funds reviewed, the lowest-carbon fund is the Ariel Appreciation Fund, clocking in at 98 tons CO2 / $ million revenue, while the Sentinel Sustainable Core Opportunities Fund produces a whopping 692 tons CO2 / $ million revenue! Why the difference? According to Trucost, the Sentinel Fund is invested in some high-carbon utility and and industrial stocks (ConocoPhillips and Devon Energy among them, according to Sentinel’s latest annual report). The fund’s holdings must be sustainable in other ways, but certainly not in relation to climate change!
So how can you use this information to aid in your investment decisions? Right now, you can invest in (or not) the funds specifically called out in the report. However, a number of fund managers are likely to launch carbon-related investment products in the US. Standard and Poor’s now publishes the US Carbon Efficient Index, which attempts to mimic the returns of the S&P 500 via a basket of low-carbon companies. The aggregate carbon footprint of the companies in the index is about 50% of that in the broader S&P 500. It shouldn’t be long before mutual funds based on the new index appear in the market. That is, if there’s a market left to appear in!
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