Carbon Neutral Funds Are Turning into Powerful Decarbonisation Tool

New trends are pulling markets into carbon neutral territory, but what are carbon neutral funds and how do they work?
WESTMINSTER, U.K. - Feb. 7, 2022 - PRLog -- Investment managers around the world are increasingly waking up to climate change. From the decarbonization toolkit, investment managers are eyeing a new concept –  carbon neutral funds. But what does a carbon neutral fund look like, and what does this mean for investors?

Trending to a Low-Carbon Economy

Under the Glasgow Financial Alliance for Net Zero (GFANZ) initiative, over $130 trillion of globally managed assets have committed to achieve net zero by at least 2050, with names including some of the world's largest asset managers like Invesco, Vanguard and BlackRock committing to achieve a net zero target across their business operations, but most importantly across all of their very sizeable investment portfolios.

The trend toward carbon neutrality and associated costs of carbon offsetting is adding pressure on companies to lower their emissions. The number of companies with credible net-zero targets has more than doubled in the past year. However, high-emitting companies are still lagging behind, with only 17 per cent aligned on the pathway to keep temperature rise at two degrees or below by 2050. The challenge for reaching a truly low carbon economy is that for many companies, an estimated 30% of emissions are very hard to abate, and require a comprehensive offsetting strategy to reach carbon neutrality.

Outside of de-carbonization investments, some asset managers have considered pushing their investment mandates further by compensating all, or part, of the carbon emissions linked to their portfolio companies through the purchase of carbon offsets. A recent trend is seeing some asset managers launch new "carbon neutral" share classes granting investors an option to offset the carbon emissions attributable to their investments at a modestly higher management fee. Some fund managers are also considering re-investing part of their performance fee or "carried interest" (linked to the fund's outperformance over time) into a charitable pool or foundation whose goal is to back carbon offsetting projects.

A carbon neutral fund relies on accurate estimates of the carbon footprint of the portfolio. Clearly, this is no simple task, requiring a detailed carbon footprint analysis of the investments in the portfolio across key carbon metrics – such as Scope 1 and 2 carbon emissions – carbon intensity levels and net zero commitments. Tools and analytics are starting to be developed to understand the carbon footprint of investment portfolios, quantify risks and opportunities from a carbon perspective, as well as determine the specific portfolio constituents which have already established a plan to reduce emissions or reach net zero. Further disclosures and reporting are being pushed by large institutional investors, and increasingly regulators, now requiring deeper levels of transparency on climate-related disclosures.

Read the full article on abatable's blog.

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