Carbon Footprint Assessment of Major US Mutual Funds may have flaws

Environmental consulting company Trucost has released a report detailing the carbon footprints of major US Mutual Fund companies.  It analyzes the carbon footprint 'owned' by 91 funds representing a combined value of 1.5 quadrillion dollars.

The key take-home message is this:

Companies that rely heavily on carbon-intensive operations and supply chains relative to sector peers could be most exposed to carbon liabilities.  High emitters which find it difficult to fully pass these liabilities on in higher prices without losing market share could see profi ts fall, unless they profoundly change the goods they produce or how they produce them. Companies that are more carbon-effi cient for their sectors, with limited exposure to direct carbon costs or indirect costs passed on in input prices, stand to gain competitive advantage. Carbon pricing could present opportunities for low-emission companies in carbon-intensive sectors.

Though I'm highly impressed by the scope of this work, I'm very skeptical of the methodology used to create these carbon footprints.  From Appendix One of the report:

To limit any issues associated with double counting GHG emissions, Trucost analyzed only the direct and first-tier indirect emissions for each company in a fund.  First-tier GHGs are emitted by direct suppliers to a company, such as electricity and logistics providers.  These emissions are generated from the production of goods and services purchased by a company.  Where adequate data is not disclosed, indirect impacts are estimated by employing Trucost's input-output methodology to present a supply chain model for a company. (emphasis mine)

I gather that the majority of the data used by Trucost was taken by the excellent work done by the folks at the Carbon Disclosure Project, a global initiative to have institutional investors nicely 'request' companies' release of their greenhouse gases (way to go Tony Blair!!).

Two areas I need more clarity before giving this report my full two-thumbs-up:

(1)  Was the equity model accurately applied when assessing the boundary risks of each mutual fund?  From the methodology it's unclear to me whether or not each fund's carbon footprint included 100% of each investment's footprint, or whether or not they (more accurately) included only the percentage of an investment's footprint based on that fund's equity share in that company (eg. why should a fund be responsible for 100% of an investment's emissions if they only own 15% of the company's shares?).  Based on the methodology, this is unclear to me.

(2)  The other issue that I have with the methodology used by this Trucost report is how their 'input-output methodology' is built.  Supply chain and life-cycle analyses are notoriously difficult to accurately measure, even for those internal to a corporate supply chain.  I worry about the accuracy of Trucost's supply chain models and whether or not they meet recognized international carbon accounting and disclosure standards.  The next line from Appendix One:

In a number of sectors indirect GHG emissions are greater than their direct emissions.

That indirect GHG emissions can be greater than direct emissions is not uncommon.  The direct emissions I use in heating my house are likely much less than those emitted from the sourcing of raw materials for and the assembling and shipping of every appliance, piece of furniture and building material in my home.  Therefore it's important that reports of this nature disclose their supply chain methodologies so that we can all see whether or not the measured indirect emissions are material to the overall footprint; or whether, like the emissions used to extract my furnace metal, the analysis includes emissions so far up the supply chain that it has little relevance to the total GHG disclosure.

Overall, the take home message is still spot on: Investment funds need to assess the carbon risk of their portfolios.  But it's important for companies to start clearing away the confusion surrounding carbon accounting and inventory, and greater transparency can only help matters and build greater public trust in the carbon accounting system.

Original story from Treehugger.  Download the report here.

UPDATE:  The folks at Trucost gave me a call yesterday, letting me know that their information comes from internal research, including research of publicly available corporate CSR reports.  Still, given the dearth of GHG accounting experts out there, I wonder if even the these CSR reports properly document emissions.  Kudos to Trucost, nonetheless.