The dirty secret in your investment portfolio

"How you invest your savings might just be the single most important determinant of your carbon footprint."

Chances are you heard about the controversial study released earlier this year that said the greatest impact individuals can have in fighting climate change is to have one less child.¹

According to the study, the next best actions are selling your car, avoiding flights and going vegetarian - actions that many of us commit to routinely in an effort to lessen our footprint and combat climate change, but which pale in comparison to the choice of having one fewer child.

But to the team of advisors at Canadian sustainable investment firm CoPower, the study left out a critical component of an individual’s personal decisions - how we invest our money.

When they dug a little deeper, they were shocked to discover that the average investor does more climate damage with their investment portfolio than they do with all other actions in their daily lives combined.

Take the example of a married couple, Jamie and Leslie. Jamie is a government employee and Leslie is a doctor. They own a home downtown and consider themselves to be environmentalists. Their latest car purchase was a hybrid, although it doesn’t get that much use since their neighbourhood is walkable. They’ve been reducing their meat consumption and often try to buy local or organic. They take one trip by plane per year. A personal carbon calculator would give them a combined footprint of approximately 23 tonnes per year.²

The total value of their combined investment portfolio is $500,000. The carbon impact of that portfolio: a whopping 46.7 tonnes of CO2** per year, double that of their other personal decisions.³

And the climate impacts of our investments are not limited to only well-off individuals like Jamie and Leslie. According to CoPower, an investment of just $10,000 in the Toronto Stock Exchange index has an annual carbon footprint of 800 kg CO2** - equivalent to driving 1900 miles in a car, tumble-drying 332 loads of laundry, or eating 264 quarter-pound hamburgers.

‍The upside of all this is that unlike the major life decision of whether or not to have children (which for many of us might be too late!), factoring climate change into our investment decisions is a powerful and relatively simple way to do better.

"Over the past decade we’ve seen investors become increasingly concerned about how and where their money is invested and the impact of those investments on the climate," said Patti Dolan, a portfolio manager at Raymond James. "In our own selection process, evaluating the environmental, social  and governance practices of the companies we invest in, as well as their preparedness for climate change has become increasingly important."

And the good news is, as Dolan notes, there are profits to be made too. "The data shows that considering that impact, positive or negative, in addition to financial metrics actually leads to more educated investment decisions and often improved financial performance."

By transferring even just a portion of their investments to a fossil-free fund, the average person could shrink their carbon footprint significantly.

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And it’s easier than it sounds. To get started:

1. Understand your carbon impact. Tools like Fossil Free Funds help you look up the carbon impact of your mutual fund and Decarbonizer helps you see how your portfolio would perform historically if you removed some of the dirtiest polluters.

2. Learn about impact investing options and take action.  Open Impact is a catalogue of impact investing products.

3. Seek help from a Responsible Investment (RI) Certified Advisor or sustainability consultants to provide trustworthy, credible advice on how to divest.  

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Notes and References:

1. The initial study referenced, “The climate mitigation gap: education and government recommendations miss the most effective individual actions” was published by researchers at the University of Lund in July 2017.

2. The personal carbon footprint numbers for our couple, Jamie and Leslie were calculated using: https://www.footprintcalculator.org/. Other personal carbon impact numbers were based on the EPA’s GHG calculator.

3. Our example investment portfolio assumes a 50/50 split between two typical funds, the S&P/TSX Composite Index Fund and the MSCI World Index Fund. The carbon impact of this portfolio was calculated by using the Index Carbon Footprint Metrics and using October 27th, 2017’s spot US to CAD exchange rate of 0.78.

4. The carbon impacts of daily actions found throughout this blog and infographic were drawn from the EPA GHG emissions calculator, the Lund study and the Guardian. Specific numbers for the following actions can be found here: driving, burgers, tumble-drying laundry, an omnivorous diet,flying, having a child, driving a gasoline car.