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The perils of a narrow lens

Most carbon footprint methodologies focus on direct emissions from owned or controlled sources, plus emissions from the generation of purchased energy. However this focus on carbon footprinting is potentially missing significant risks in portfolios and can even, at times, be misleading.

Infrastructure and utilities are at the epicentre of global efforts to reduce carbon emissions. The power generation and transport sectors, along with the infrastructure that supports them, need to evolve their business models for a two degree scenario to be achievable. Allocating capital appropriately within this space can effect meaningful change in the fight against climate change.

Investors measuring a company’s green credentials with carbon footprinting may be missing significant risks in their portfolios.

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

Working through the value chain

Here we compare NextEra Energy (NextEra), which is the largest wind operator in the United States with Enbridge Inc, a Canadian oil pipeline company.

The following chart compares their carbon intensity over time using a traditional (or ‘direct emissions’) approach. On this metric, Enbridge appears to be far 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 produced by its power plants are allocated to the utility.

This analysis misses that Enbridge’s assets are responsible for transporting 65% of all Canadian energy exports to the US. It also misses that NextEra is much better positioned for the transition towards a lower carbon economy.

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



As at 30/06/2018. Source: First Sentier Investors & Bloomberg

Flaws of a single metric

Using carbon intensity as the only form of analysis has the following flaws:

  • It ignores change. Carbon emissions for NextEra fell by 6% CAGR (Compound Annual Growth Rate) over this period, reflecting its investments in wind technology and improved carbon efficiency. The corresponding change for Enbridge is zero.
  • It ignores climate action. 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.

It is crucial to look beyond a single metric when looking at sustainability or decarbonisation, as this approach may not deliver the anticipated outcome.

We encourage people to consider the limitations of focusing on a single metrics like carbon footprinting, and instead consider a suite of factors that provide fuller context and deeper insights into the real risks and opportunities associated with climate change and decarbonisation.


Important Information

This material has been prepared and issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017) (Author). The Author forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group. A copy of the Financial Services Guide for the Author is available from First Sentier Investors on its website.

This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation. Any opinions expressed in this material are the opinions of the Author only and are subject to change without notice. Such opinions are not a recommendation to hold, purchase or sell a particular financial product and may not include all of the information needed to make an investment decision in relation to such a financial product.

To the extent permitted by law, no liability is accepted by MUFG, the Author nor their affiliates for any loss or damage as a result of any reliance on this material. This material contains, or is based upon, information that the Author believes to be accurate and reliable, however neither the Author, MUFG, nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of the Author.