The issue of climate change is having real investment implications today which we believe will continue into the future. However, as we have described previously, the focus on carbon footprinting is potentially missing significant risks in portfolios and can even, at times, be misleading.

Most carbon footprint methodologies take a straightforward perspective. They focus on direct emissions from owned or controlled sources, plus emissions from the generation of purchased energy.

In a recent white paper the portfolio manager of our Sustainable Infrastructure strategy, Rebecca Sherlock, discussed some of these issues when comparing pipeline companies and utilities. An extract of the paper is below.

Most carbon footprint methodologies take a straightforward perspective. They focus on direct emissions from owned or controlled sources (scope 1), plus emissions from the generation of purchased energy (scope 2). This approach can lead to assets appearing carbon friendly, despite a close association with substantial emissions further along the value chain.

Our team believes it is more realistic to take a ‘lifecycle’ approach to emissions. This point can be clearly demonstrated by comparing a utility with an oil pipeline company.

Enbridge Inc. is a North American energy infrastructure company which owns extensive crude oil and liquids pipeline networks. Enbridge’s assets are responsible for transporting 65% of all Canadian energy exports to the US. 90% of Canadian oil production comes from tar sands.

NextEra Energy is a regulated utility in the US. Its assets include FloridaPower & Light Company, a regulated electric utility business, and NextEra Energy Resources, a clean energy leader which is the largest wind operator in the US, with a growing portfolio of solar assets.

The following chart compares the carbon intensity of the two above mentioned companies over time, taking a traditional (or ‘direct emissions’) approach.

Our team believes it is more realistic to take a ‘lifecycle’ approach to emissions.

On this metric, Enbridge is clearly much less carbon intensive than NextEra. This is because the emissions associated with the fossil fuels transported by Enbridge are allocated to the transport sector and not to Enbridge itself. However in NextEra’s case, the emissions from power generation are allocated to the utility.

Using only the carbon footprint the preference would clearly be Enbridge, but which company actually faces the greatest risks from climate change and transition to a low carbon economy? Using carbon intensity as the only form of analysis has the following flaws:

  • It ignores change. Carbon emissions for NextEra fell by 6% CAGR over this period, reflecting its investments in wind technology and improved carbon efficiency. The corresponding change for Enbridge is zero.
  • An investment premised solely on the metric of carbon intensity supports the use of oil pipelines versus other cleaner resources – thus having no impact on climate action.
  • It ignores stranded asset risk. Following progress in clean energy generation, the disruption of the transport sector could represent the next global wave of decarbonisation. This implies a structural decline in demand for oil, and a risk that infrastructure associated with oil storage and transportation may no longer be able to earn an economic return.

 

Carbon Intensity Scope 1+2 over time (metric tons/revenue)

As at 30/06/2018. Source: Colonial First State Global Asset Management/First State Investments & Bloomberg.