FÉRIQUE Funds' carbon plan: less carbon for the planet and less risk for investors

In 2021, FÉRIQUE Fund Management adopted a carbon plan to protect the FÉRIQUE Funds from the risks associated with the energy transition, while contributing to the global reduction of greenhouse gas (GHG) emissions. The objective is to achieve carbon neutrality for our Funds Family by 2050 at the latest, in line with the Paris Agreement.

One year later, how much progress have we made toward our goals? Here’s a summary of the first steps taken, some key benchmarks we use to track our efforts and an outline of how far we still have to go.

Given the scale and complexity of the challenge, our immediate approach is to lay the foundations that will allow us to expand our action. We are going about it pragmatically, as we have always done when it comes to responsible investment. Our approach involves two stages:

First, for clients who want to get ahead of the curve by contributing to the energy transition right away, we aim to offer funds that target lower carbon emissions like the FÉRIQUE Sustainable Development Funds: FÉRIQUE Global Sustainable Development Bond Fund and FÉRIQUE Global Sustainable Development Equity Fund. Beyond our convictions and values, these strategies are well positioned for the structural changes taking place during the global energy transition.

Second, we’re working with portfolio managers and sub-managers across the FÉRIQUE Funds Family to gradually improve our strategies’ resilience to the transition. This stage involves risks and opportunities, and our job is to retain managers who understand the issues.

Over the past year, we have put in place a process that tracks our portfolios’ emissions. In this way, we ensure that our portfolio managers join us in the project to decarbonize the economy by aiming for emission reductions in all the sectors of activity we invest in.

This process entails an assessment of our Funds Family’s carbon footprint. Since 2019 and as of June 30 2022, on an annual basis, we have measured scope 1 and 2 GHG emissions per million dollars invested (this methodology widely used in the industry is discussed in detail later in the article) for equities in the FÉRIQUE Funds¹ Family relative to a benchmark² . We chose 2019 as the base year because it was the last year of economic activity before the pandemic and it’s the benchmark used by most of the managers taking part in the Net Zero Asset Managers Initiative (NZAMI)³ . Note that, at this time, we cannot provide the carbon footprint of our bond investments for lack of consensus on the methodology to assess the footprint of this asset class, in particular for government bonds.

Our latest survey, carried out in June 2022, shows that the carbon footprint of the equity portion of the FÉRIQUE Funds Family was 27% lower than the benchmarks index. The level of emissions for the portfolio was 63 tons per million dollars invested versus 86 tons per million dollars invested for the benchmark. To give you a more concrete idea of the concept of CO2 equivalents, each ton represents an estimated 5,181 kilometers⁴ travelled by car.

The variance in favour of the FÉRIQUE Funds Family is due mainly to our responsible investment approach, which is based on many complementary pillars: the exercise of proxy voting rights; shareholder engagement⁵; the integration of ESG criteria (environmental, social and governance) into investment decisions; and, since December 2021, the addition of thematic funds focused on sustainability.

One of the Funds in particular, the FÉRIQUE Global Sustainable Development Equity Fund, which focuses specifically on sustainability opportunities and issues, presents a carbon footprint which is 82% lower than its benchmark: it has 16 tons of CO2 per million dollars invested whereas the index has 87 tons as of June 30, 2022⁶).

But how do we calculate such figures and what do scope 1 and scope 2 mean?

Here’s a brief guide.

Since the Kyoto Protocol, signed in 1998, various standards have been put forward and constantly improved to categorize and measure GHG emissions by businesses. One such standard is the Greenhouse Gas Protocol⁷, proposed in 2001. More recently, in 2017, the Task Force on Climate-Related Financial Disclosures (TCFD)⁸ established standards for climate-risk disclosure and management by companies, including carbon metrics and targets. In general, GHG emissions are divided into three categories.

• Scope 1 emissions are direct emissions. They include all emissions from sources owned or controlled by a company, such as its manufacturing process or gasoline used in its operations.
• Scope 2 emissions are indirect energy-related emissions. This category includes emissions from purchased energy that enables the company to operate, such as electricity from coal or other sources.
• Scope 3 emissions are other indirect downstream or upstream emissions. This category is the broadest and it includes various types of emissions, such as transportation of materials and business travel as well as GHGs generated by the use or consumption of the products manufactured by the company. Consider, for example, manufacturers of automobiles or household appliances.

Scope 4 emissions are under consideration, namely avoided emissions, or emissions reduced by the use of a product. For example, we can assume that the construction of wind turbines generates GHGs (scope 1), but that their use also reduces emissions (scope 4). The Scope 4 emissions category is still subject to debate and has not been standardized.

Using Amazon as an example provides a better understanding of the three GHG emissions scopes (scope 1, 2 and 3) that are subject to standardized metrics. In 2021, the company’s sources of emissions were summarized as follows.

As can be seen, Amazon’s GHG emissions for 2021 totaled 71.54 million tons, namely the sum of scopes 1, 2 and 3. Of this total, the GHG scope 1 emissions, or direct emissions, accounted for 16.9% and GHG scope 2 emissions, consisting mainly of electricity purchases, accounted for 5.7%. But Amazon’s carbon footprint is largest in terms of scope 3 GHG emissions, accounting for more than 75% of all its emissions. This scope includes servers, vehicles, warehouses, third-party transportation, packaging and many upstream emission sources.

Scopes 1 and 2 GHG emissions are the most commonly measured by companies and the ones for which data are most accessible. Under pressure from activist groups, companies are increasingly disclosing this information according to recognized standards.

That being said, as disclosure is voluntary, the proportion of companies that don’t provide such information is still significant (60% of global markets by MSCI⁹). Moreover, scopes 1 and 2 GHG emissions overlap somewhat, which can result in duplicate counting. Even so, methodologies to address these problems are being put forward, including estimates based on comparable. For example, based on the emission for a known company, data providers will be able to estimate the emissions of other companies in the same sector that do not yet disclose such figures. Among other things, they will use the ratio of GHG emissions according to revenue level (or the carbon intensity ratio) to estimate that of others by using their sales figures.

Scope 3 GHG emissions are more difficult to measure because of an even greater lack of data – only 25% of companies disclose it¹⁰ – and, here too, there is some overlap. But it is crucial to quantify a company’s total footprint: according to CDP¹¹, a not-for-profit standards body, as much as 75% of emissions are scope 3. For now, scope 3 emissions are assessed by data providers with methodologies that vary among them, including the carbon intensity ratio discussed above. The exercise is becoming more refined, and a more generally accepted standard should be in place in a few years. Given the lack of data and divergent methodologies for estimating Scope 3 GHG emissions, they are currently excluded from the calculation of the carbon footprint of the FÉRIQUE Fund Family. However, reducing Scope 1 and 2 GHG emissions contributes to lowering Scope 3 emissions due to the overlap.

Several methods can be used to evaluate and compare the level of emissions of one portfolio to another depending on the objective. In an investment context, in this case with the FÉRIQUE Fund Family, the method presented to measure the level of carbon emissions is per million invested. This method has the advantage to easily quantify and compare an investor’s carbon footprint and follow-up over time. Its disadvantage is that it is influenced by stock markets performance: a drop in the financial markets, and therefore in company’s valuation, results in an increase in the ratio of the carbon footprint of the portfolio even though the companies do not emit significantly more CO2 – the drop of the denominator increases the ratio’s result. The comparison with a benchmark index helps mitigate the impact of stock markets.

To determine the level of emissions of a portfolio, we add the emissions of each company multiplied by the percentage of each company held, as shown in the following table.

We then divide the total by the size of the portfolio so that we can compare different portfolios.

The use of these indicators is in its infancy, so caution is called for. For example, GHG emissions vary greatly from one stock market to another, depending on the sector breakdown (think of Canada, a rich country in natural resources compared to a poor country in natural resources such as Belgium, for example!). Similarly, because there is still no consensus on how to calculate Scope 3 GHG emissions, they could have a significant impact on overall indicators once generally accepted standards are in place.

Finally, it should be noted that FÉRIQUE Fund Management does not set an annual reduction target. We think a portfolio’s level of emissions can fluctuate in a given year solely as a result of the sectoral weight of some industries, which can vary according to changes in stock prices. For example, a more-polluting sector such as Energy has acquired a greater weight in 2022. For us, the main thing is not to manage these short-term fluctuations but, rather, the long-term trend, as well as our 2030 interim targets and our 2050 final targets.

In addition to assessing our portfolio’s carbon footprint, we have moved forward on two other main fronts in 2022.We have added the objective of carbon neutrality to the FÉRIQUE Funds’ Prospectus and responsible investment policy. We have worked with our portfolio managers and sub-managers to ensure their investment strategies now incorporate two essential elements: first, FÉRIQUE Fund Management’s carbon-neutrality goal and their commitment to helping us achieve it; and, second, their intention to make three commitments related to climate issues each year in respect of portfolio companies. In this context, a commitment refers to the use of shareholder influence to encourage a company to adopt practices that address ESG issues.

Over the next two years, we plan to set interim targets with our external managers that will be aligned with our own GHG reduction targets of 45 to 50% by 2030.

Considering ESG issues has always been part of our asset managers’ security valuation process. But, more than ever, we’ll be using levers at our disposal to achieve a solid financial performance, informed management of energy-transition risks and a healthier living environment for all.