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Carbon Offsets May Slow Global Warming. But the Math Can Get Tricky. – Barron’s

Given the challenge of measuring carbon footprints, it’s hard to be certain that a fund is truly carbon neutral or net zero. Above, steam billows from the cooling towers of a coal-fired power station.

Carla Gottgens/Bloomberg

The fund industry is trying to attract environmentally conscious investors by going one step further in the battle to curb climate change: Some funds claim to be carbon neutral, which means they’ll directly offset the carbon emissions their portfolio companies are responsible for by investing in projects that prevent the release of, reduce, or remove greenhouse-gas emissions.

That’s all fine, but investors should check on just how effective these efforts are—and on who’s verifying those claims.

The first such vehicle, the HANetf S&P Global Clean Energy Select HANzero UCITS exchange-traded fund (ticker: ZERO.UK), was launched in Europe by Toronto-based Purpose Investments in June. The fund tracks the S&P Global Clean Energy Select Index, but says that any carbon footprint linked to its portfolio will be neutralized through carbon-offset programs. In July, Saturna Capital launched the Saturna Sustainable ESG Equity HANzero UCITS ETF (SESG.Italy), which also aims to be carbon neutral, but is actively managed.

U.S. investors have more recent options: At the beginning of September, the $106 million Change Finance U.S. Large Cap Fossil Fuel Free (CHGX), launched in 2017, became the first U.S. ETF to try to go carbon neutral through offset programs.

In Canada, Purpose Investments added a carbon-neutral share class for its existing cryptocurrency ETFs—the $1.4 billion Purpose Bitcoin (BTCC.Canada) and the $441 million Purpose Ether (ETHH.Canada). Existing investors in the funds can move assets to the new share class without incurring taxes and fees.

Path to Net Zero

These ETFs are going carbon neutral by offsetting the greenhouse-gas emissions their portfolio assets are responsible for.

ETF / Ticker Expense Ratio AUM (mil) Asset Class
Change Finance U.S. Large Cap Fossil Fuel Free / CHGX 0.49% $106 Stock, index-tracking
Purpose Bitcoin / BTCC.Canada* 1.00 1,400 Cryptocurrency
Purpose Ether / ETHH.Canada* 1.00 441 Cryptocurrency
HANetf S&P Global Clean Energy Select HANzero / ZERO.UK 0.55 3 Stock, index-tracking
Saturna Sustainable ESG Equity HANzero / SESG.Italy 0.75 4 Stock, actively managed

Note: *Only one share class of the crypto funds is carbon neutral

Sources: Change Finance; Purpose Investments; HANetf

“We believe in the potential of cryptocurrency, but we can’t ignore the carbon impact of Bitcoin and Ethereum mining,” said Som Self, Purpose Investments’ founder and CEO, in a statement.

Still, the claim to be carbon neutral is tricky. To start with, there is no standard measure of a carbon footprint, and corporate disclosure is voluntary in most countries.

One of the most broadly accepted frameworks is the Greenhouse Gas Protocol, which divides a carbon footprint into three buckets, or what it calls “scopes.” Scope one includes emissions associated with a firm’s own resources and operations; scope two, emissions from energy consumption; and scope three, everything else, such as emissions from the firm’s entire value chain.

According to Change Finance CEO Andrew Rodriguez, for every $1 million invested in the Change Finance Fossil Free ETF, an estimated seven tons of carbon is emitted into the atmosphere—a calculation based on the fund’s ownership share in its holdings. To achieve net zero, the company must buy an equivalent amount of carbon offsets. But this calculation counts only scope one and two emissions. If scope three were included, the number would be a lot higher.

Carbon calculations also depend on who’s counting. Fossil Free Funds, a disclosure project sponsored by shareholder advocacy nonprofit As You Sow, estimates the Change Finance ETF’s footprint at 17 tons for each $1 million investment.

Carbon accounting for crypto assets could be even more complex. Purpose Investments uses its own measurement framework specifically designed for crypto. According to the firm, the Purpose Bitcoin and Ether ETFs generate about 0.5 and 0.15 tons of carbon, respectively, for every $1 million assets in the funds.

The bottom line: Given the challenge of measuring carbon footprints, it’s hard to be certain that a fund is truly carbon neutral or net zero. Still, some offset is better than no offset.

Carbon-offset costs also vary greatly, ranging from less than $1 per ton to more than $100. That’s because each project has its own way of reducing emissions, and hence the credits are priced differently. Some projects are more effective at capturing carbon than others, while some offer benefits such as job opportunities in underdeveloped regions—and others won’t see an outcome for years.

Change Finance partnered with Grassroots Carbon, an organization that pulls carbon from the atmosphere and restores it to the soil, a practice called regenerative grazing.

Grassroots’ carbon credit costs about $25 a ton, says Rodriguez. “We can find other carbon offsets for less cost, but most programs don’t actually lead to carbon in the atmosphere being put back in the ground,” he tells Barron’s. “Most would do something like not creating carbon in the future. That’s not the same. We want to know for sure that we are actually contributing positively to solving climate change.”

For seven tons of emissions at $25 per ton, Change Finance will need to pay about $200 for every $1 million in assets in its ETF, or 0.02% of total investments. That’s less than what you might expect, because the Change Finance ETF has a low-carbon portfolio. Funds that don’t invest in low-carbon names could incur greater offset costs.

The Vanguard S&P 500 ETF (VOO), for example, is responsible for 65 tons of carbon emissions for every $1 million investment, according to Fossil Free Funds estimates.

Purpose Investments takes a different approach by investing in a variety of carbon-offset projects that are linked to clean water, greenhouse-gas capture, biomass, and forestry. The diversification could mitigate the risk of some of these projects failing to meet expectations, but requires quite a bit more vetting. Purpose told Barron’s that it expects to pay $12 to $20 per ton for its carbon-credit portfolio.

Fund companies could charge higher fees and pass along the costs of carbon offsets to investors, or cut into their own profit margins. So far, it seems to be the latter: The Change Finance ETF charges 0.49%, the Purpose crypto funds, 1%. Neither has raised fees since going carbon neutral.

Write to Evie Liu at evie.liu@barrons.com

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