Understanding Your Bond Portfolio’s Carbon Footprint

Transitioning to a net-zero carbon economy* is vitally important, and corporate bonds will play a critical role in the transition. To support that journey, sustainable investors should monitor the carbon impact of the corporate bonds in their portfolios. But there’s a lot more to understanding a bond portfolio’s carbon footprint than conventional metrics can show.

Start with Simple Metrics

Initially, investors need simple straightforward reporting that can help them grasp how their portfolios are impacting the climate. A number of providers, including MSCI, have created a range of carbon footprint metrics that compare a portfolio’s carbon characteristics with a benchmark.

For bond investors, the most relevant metric is the weighted average carbon intensity of a portfolio. This measures the portfolio’s carbon footprint in terms of the volume of carbon dioxide emissions per value of sales (tons CO2e /US$ mil.).

The metric has several benefits: it’s applicable across asset classes, is simple to calculate, doesn’t need the market cap or sales data required for other (equity ownership-related) measures, and it can be expressed in two numbers—a score for the portfolio and a score for the benchmark.

Recognize the Limitations

Inevitably, a metric that is so simple and concise has some constraints. For one, it is only a snapshot in time. That means it can’t look forward to allow for companies’ carbon-reduction plans. For instance, it penalizes heavy users of fossil-fuel energy such as utilities, even if they have a well-considered strategy to transition to renewable energy sources.

Secondly, it cannot capture the nuances of carbon use. The GHG Protocol distinguishes between direct (Scope 1) and indirect sources of carbon emissions (Scopes 2 and 3). The distinctions depend on whether a company emits the carbon itself as an intrinsic part of its business (such as manufacturing) or as a user of energy (heating or cooling) or further up or down the supply chain (distribution or business travel). Providers of conventional climate data and metrics can reliably measure Scope 1 and 2 emissions but are only starting the complex task of factoring in Scope 3.