Dirty Feet: Portfolio Carbon Project

Analyzing the risks and opportunities to largest 10 unit trusts and largest 40 companies on the Johannesburg Securities Exchange from the pricing of externalities in 2011

DIRTY FEET: Portfolio Carbon, January 2012 Portfolio risks and opportunities from the carbon intensities of the 40 largest listed companies in South Africa by Graham Sinclair, Stefano Dell’Aringa and Liesel van Ast

Sustainable long-term investment performance relies on a full appreciation of the risks and opportunities that portfolio investee companies face. Designing sustainable investment strategies requires accurate analysis of material environmental, social and governance (ESG) factors. Focusing on one major ESG factor in South Africa today, greenhouse gas emissions, SinCo presents analysis of Trucost research on the carbon footprints of major companies and major investors. 

This Dirty Feet: Portfolio Carbon report examines the carbon risks of the 40 largest companies by market capitalisation in the Johannesburg Securities Exchange All Share Index (JSE ALSI 40 Index), and the carbon footprints of major pooled equity funds (unit trusts) investing in South Africa today. The analysis, based on internationally-tested methodology, also assesses the effects of reducing emissions on portfolio performance via a hypothetical “carbon optimized” fund based on the 40 South African companies. This identifies an opportunity to reduce portfolio exposure to carbon pricing set to be introduced in countries including South Africa (S.A.) within the next three years, while tracking the returns of the parent index. Long-term investors are increasingly aware of the potential impacts of ESG factors on their 10-year investment horizons.

Dirty Feet: Portfolio Carbon offers new, robust analysis of the challenge faced by major South African companies, and the listed equity funds that own them, of growing in a low-carbon, climate-resilient future for Africa’s largest economy. This evidence-based research using a global best practice methodology analyzing JSE 40 Index companies and top 10 funds demonstrates that there are strong financial incentives for investors, including pension funds and asset managers, in large capitalization companies to ensure that carbon risk is actively considered as a material factor. There is a need for major S.A. JSE-listed companies to clearly articulate to shareholders, policymakers and regulators their plans and practices in managing their carbon footprints and ESG issues. There is also a clear case for comprehensive, mandatory company reporting on carbon in annual reports & accounts.


> DOWNLOAD PDF below

 
PEOPLE

All our projects depend on peers, colleagues and stakeholders to increase the authenticity and insights we offer. The Portfolio Carbon (South Africa) 2012 project acknowledges the input of Damon Badenhorst, Christina Belo, Jon Duncan, Shameela Ebrahim, Barbara Evans, Saliem Fakir, Malcolm Gray, Jon Hanks, Bruce Kahn, Kerry Kilcullen, Christopher McKnett, Makhiba Mollo, Malango Mughogho, Corli le Roux, Lauren Smart and Kirsty Stewart.
Written by Graham Sinclair and Liesel van Ast, Research Editor 
http://www.linkedin.com/profile/view?id=32936677&locale=en_US&trk=tyah2
Investment value chain analysis by Graham Sinclair
Carbon data and analysis by Stefano Dell’Aringa, Head of Research
http://uk.linkedin.com/pub/stefano-dell-aringa/22/748/14a


PARTNERS

About SinCo
SinCo – sustainable investment consulting – is a boutique investment advisory firm specializing in sustainable investment architecture in frontier and emerging markets. Since 2006 SinCo has delivered sustainable investment architecture globally to pension funds, asset managers, private equity funds, stock exchanges and international organizations integrating environmental, social and governance (ESG) factors into investment practice for sustainable long-term investment performance. www.sincosinco.com 
SinCo supports Africa Sustainable Investment Forum (AfricaSIF.org) and its mission promoting sustainable investment in Africa from www.africasif.org


About Trucost
Trucost Plc was established in 2000 to help organizations, investors and governments understand and quantify the environmental impacts of business activities. Over the past 11 years Trucost has researched, standardized and validated environmental data from organizations worldwide. The result is the world’s most comprehensive data on corporate environmental impacts, covering greenhouse gases (GHGs), water, air pollution and waste. This enables our clients to access:
• The most efficient approach to measuring GHG emissions and wider environmental impacts
across organizations, supply chains and investment portfolios;
• Clear identification of priority areas for reducing environmental impacts;
• Validation of source data, including completion of information gaps where data are
not disclosed;
• Comparison of environmental performance against peers, sectors and investment benchmarks;
• The ability to create environmentally-efficient investment products.
trucost.com

MEDIA RELEASE

MEDIA RELEASE: 12 January 2012 IMMEDIATE RELEASE
ISSUED BY: SinCo + Trucost


Cape Town, South Africa and London UK, Thursday 12 January 2012

SinCo + Trucost report on carbon footprints of 10 most popular investment funds in South Africa; top 40 companies in South Africa exposed to carbon risks

Dirty Feet: Portfolio Carbon, describes the exposure to carbon costs of the 40 largest listed companies on the Johannesburg Securities Exchange (FTSE/JSE Top 40 Index), as well as among major pooled equity investment funds (known as “unit trusts”) investing in South Africa. It poses 10 critical questions investors and companies must answer in 2012.

SinCo – the sustainable investment consultants - commissioned environmental research firm Trucost to analyze greenhouse gas (GHG) emissions from the FTSE/JSE Top 40 and to measure the carbon footprints of 10 of the largest South African equity funds to assess potential financial risk under legislation to introduce carbon pricing in countries including South Africa (S.A.) within the next three years. 

“Dirty Feet presents evidence-based research that helps investors put numbers to scenarios in the post-COP17 world,” said Graham Sinclair Principal at SinCo. “A key question for investors is: are there opportunities for investment approaches in climate finance or mitigation and adaptation strategies at country or company levels? We see opportunities to invest in low-carbon technologies and business models not factored into valuations.”

Externalities can be internalised by charging firms for the damages caused by their pollution , and by making them more accountable for emissions. By putting a price on carbon, government policies will give companies a financial incentive to generate and use energy more efficiently and develop low-carbon business models and supply chains. Investors need to understand which companies stand to gain from regulations and market-based instruments such as taxes on carbon dioxide emissions , and which will lose out.

Findings show that while carbon costs will initially have a limited impact overall, carbon risks could be material for some companies and investors. The companies directly emitted almost 109 million tonnes of GHG emissions, measured in carbon dioxide equivalents (Mt CO2e ) globally, which equates to 20% of South Africa’s carbon emissions in 2010. If the companies were to pay the carbon tax rate of R75 (US$8.97) per tonne of CO2e for direct operational emissions globally, carbon costs could amount to almost US$974 million. This would equate to 0.2% of revenue or 1% of earnings before interest, taxation, depreciation or amortization (EBITDA) on average across all 40 companies.

Earnings could also be exposed to carbon costs in the Oil & Gas, Basic Resources, Retail, Industrial Goods & Services and Food & Beverage sectors. Profit risk from carbon costs can vary widely for companies within sectors, with Sasol Ltd and Harmony Gold Mining Co. Ltd among companies most exposed. Some companies are more exposed to indirect carbon costs passed on by suppliers than to direct costs from operational emissions. There are strong financial incentives for investors, including pension funds and asset managers, to ensure that large capitalization companies actively consider carbon risk as a material factor.

“Our research shows that the transition to a low-carbon economy will create winners and losers,” said Lauren Smart, director at Trucost. “Companies that act now to cut greenhouse gas emissions from their operations and supply chains will be less exposed to rising carbon and energy costs than slower-to-respond, carbon-intensive competitors. Investors can identify risk and opportunity by integrating carbon metrics into their financial analysis.”

“The new Pension Funds Act Regulation 28 effective from 1 January 2012 also implies retirement fund investment policies need to factor in environmental, social and governance (ESG) factors,” added Graham Sinclair, Principal of SinCo, “and Dirty Feet: Portfolio Carbon report lists 10 critical questions investors should be asking in 2012.”

“Studies of this nature provide insights into exposure a South African portfolio may have to issues such as carbon tax and/or energy price increases,” said Jon Duncan, ESG analyst for OMIGSA's Equity Research boutique.

South Africa is a significant market for sustainable investment: the IFC-SinCo study (July, 2011) estimated US$125 billion of investment integrates environmental, social and governance (ESG) factors in sub-Saharan Africa.  At the same time, ESG-branded investment products represent less than 1% of assets under management (AuM) or US$5.5 billion. But the carbon pricing of scenarios is absent from the major unit trusts, creating risks to investors.


KEYPOINTS FOR INVESTORS
•    The carbon footprints of equity funds analyzed ranged from 387 tonnes of carbon per US$m revenue for the Nedgroup Investments Rainmaker Fund to 1,151 tonnes of carbon/US$m for the Allan Gray – Stable Fund.
•    Eight of the funds invested in stocks that were more carbon-intensive on average than JSE40 sector peers. 
•    Trucost created a carbon optimized version of the FTSE/JSE Top 40 Index with a 7% smaller carbon footprint. Carbon risk could be reduced further by re-weighting the JSE All-Share Index, as it has a larger universe of constituents within sectors. 
•    Investors expect ESG issues to have an impact over the next 10 years. Climate-related risks, ranging from water scarcity to greenhouse gas emissions, will impact investment performance in the next 10 years. 


KEYPOINTS FOR COMPANIES
•    The JSE40 companies accounted for 207 Mt CO2e in 2010. Almost half of these emissions were from electricity purchases and other direct (first-tier) suppliers, such as travel and logistics providers. 
•    The Basic Resources, Oil & Gas, Food & Beverage, Industrial Goods & Services and Telecommunications accounted for 97% of total emissions.
•    At a higher future carbon price of R200 (US$23.91), direct carbon costs could amount to more than US$2.5 billion globally. This could equate to 0.5% of revenue on average across all 40 companies, or 2.7% of earnings.
•    Average exposure to direct carbon costs varies by sector. In the top five sectors, carbon costs at US$8.97/tonne (R75) would equate to between 0.06% of EBITDA on average in the Telecommunications sector and 14% of EBITDA for the Oil & Gas sector. 


REPORT LINK 
http://www.sincosinco.com/portfolio-carbon.php 
http://www.trucost.com/publishedresearch.html 

ENDS



NOTES TO EDITORS

1. Download SinCo + Trucost Dirty Feet: Portfolio Carbon report for FREE at http://www.sincosinco.com/portfolio-carbon.php OR

www.trucost.com/published-research/72/dirty-feet-portfolio-carbon
2. See also IFC + SinCo study Sustainable Investment in Sub-Saharan Africa (July, 2011) http://www.ifc.org/ifcext/sustainability.nsf/Content/Publications_Report_SI-SubSaharanAfrica 



For further information, please contact:
SinCo
Graham Sinclair, Principal

Trucost
Sarah Wainwright, Media Relations


About Sinco
SinCo – the sustainable investment consultants – is a boutique investment advisory firm specializing in sustainable investment architecture in frontier and emerging markets. Since 2006 SinCo has delivered sustainable investment architecture globally to pension funds, asset managers, private equity funds, stock exchanges and international organizations integrating environmental, social and governance (ESG) factors into investment practice for sustainable long-term investment performance. 
www.sincosinco.com  


About Trucost
Trucost Plc was established in 2000 to help organizations, investors and governments understand and quantify the environmental impacts of business activities. Over the past 11 years Trucost has researched, standardised and validated environmental data from organizations worldwide. The result is the world’s most comprehensive data on corporate environmental impacts, covering greenhouse gases (GHGs), water, air pollution and waste. This enables our clients to access: 
• The most efficient approach to measuring GHG emissions and wider environmental impacts across organizations, supply chains and investment portfolios; 
• Clear identification of priority areas for reducing environmental impacts; 
• Validation of source data, including completion of information gaps where data are not disclosed; 
• Comparison of environmental performance against peers, sectors and investment benchmarks; 
• The ability to create environmentally-efficient investment products.
www.trucost.com 

MEDIA

Media coverage of the project.

 



“Graham is a delightful and hard-working colleague. He teaches on the CSR graduate programme I lead at the University of Geneva and has been getting better every year. He is ready to take criticism and advice in a non-combatative, mature and friendly way. He is truly an expert in his field and I would highly recommend him for teaching, advising and as a colleague. My fortune to have met such a brilliant person who, no doubt, will be a future leader of many important concerns.”   -   professor and co-ordinator, CSR executive education programme, Washington DC USA and Geneva, Switzerland.




“Graham has a passion for Responsible Investing & Sustainability and as Chair of the Prudential Assets Working Group [PAWG] he brings this unique passion and energy to the group. With his focus and dedication to the sustainability cause, he manages to bring his valuable insights from various experiences in developed markets and always manages to apply this to the South African context. He is a valuable and respected member of the Prudential Assets Working Group.”   -  analyst, ESG asset manager and colleague, ASISA, Cape Town, South Africa.




“Graham served as a strategic adviser to a large US Asset manager as we worked together on developing their sustainable investment strategy. He provided on-going support to their internal team and served as a knowledgable and helpful sounding board as their staff tried to move the sustainablity 'file' forward.” - Analyst, global ESG services vendor, Boston, USA.




“Graham is an enthusiastic, positive and innovative individual who is focused on progress and change. His energy is infectious. - index manager, global ESG services vendor, Boston, USA.




“Graham is a delightful and hard-working colleague. He teaches on the CSR graduate programme I lead at the University of Geneva and has been getting better every year. He is ready to take criticism and advice in a non-combatative, mature and friendly way. He is truly an expert in his field and I would highly recommend him for teaching, advising and as a colleague. My fortune to have met such a brilliant person who, no doubt, will be a future leader of many important concerns.” - professor and co-ordinator, CSR executive education programme, Washington DC USA and Geneva, Switzerland.




“Graham has a passion for Responsible Investing & Sustainability and as Chair of the Prudential Assets Working Group [PAWG] he brings this unique passion and energy to the group. With his focus and dedication to the sustainability cause, he manages to bring his valuable insights from various experiences in developed markets and always manages to apply this to the South African context. He is a valuable and respected member of the Prudential Assets Working Group.” - analyst, ESG asset manager and colleague, ASISA, Cape Town, South Africa. 




“Graham worked on the ATNI project as external advisor and his insight enabled the project to develop from concept to implementation. He is a creative thinker with an out-of-the-box approach that was key for this project. Last but not least, he is a good team worker and fun to work with!” -Project team member: communications, international organization, Geneva, Switzerland.




“Graham is an exceptional professional in all that he does. His work is at the crossroads of business intelligence, finance and investments and sustainability. His ability to clarify objectives and execute on solutions has demonstrated the fruitful success of the business case for sustainability.” - Director and Senior ESG Analyst, global asset management arm of major European bank, New York, NY USA. 




“Graham is passionate and committed to Responsible Investment. I first became aware of Graham in his UN PRI role. More recently I have worked with Graham on the ASISA Prudential Assets Working Group. The group is working to improve collaboration and consensus in the investment industry on material Responsible Investment issues. A recent important result was the South African Treasury accepting and integrating into Regulation 28 of the Pension Funds Act, a recommendation from the work group that trustees of Pension Funds should consider material ESG issues for all asset classes. It has been a pleasure to work with Graham.” - Senior Investment Analyst, active ownership ESG asset management firm and colleague, ASISA, Cape Town, South Africa.




"Graham brings energy, ideas and networks for solutions to complex challenges linking good business practice with good development practice. He is an exceptional facilitator of expert panels and groups of diverse stakeholders." Manager, international financing facility, international organization, Geneva.




"
Graham is as passionate about sustainability as he is about emerging markets and the African continent in particular. He is a very hard worker who sets about his taskas with enthusiaism and creativity.Those qualities were instrumental in ensuring a sizeable contingent of signatories to the Initiative in South Africa within a relatively short space of time. His skills and drive will be sorely missed." 
CEO, PRI signatory organization.




"For many investors, getting to grips with ESG issues in emerging markets is a top priority. Graham's work at PRI was crucial in encouraging newpartnerships in diverse markets for this valuable work." Executive Director, foremost responsible investment organization in Asia and former i-banking analyst.




“Graham has been the driving force behind the PRI in EM Working Group, bringing the necessary expertise, energy and ingenuity to mobilise a group of interested asset managers and asset owners and stimulate collaborative action. His commitment, along with his convening and facilitation skills, will make him a great asset for future employers.” - SRI Analyst & PRI Coordinator, global asset manager, Paris, France.




Graham is one of those people whom you will rarely meet in life. He is someone who you will almost immediately admire for his obvious love for, and knowledge of, his subject area. He is someone with whom you will quickly become close friends because of his truly genuine and welcoming nature. And, most meaningful of all, he is someone for whom your respect will only grow the longer that you know him based on his commitment to his personal and professional passions, not to mention for his true commitment to yours as well.” -Policy Advisor, US Secretary of State Office, Washington DC, USA.




“I have met Graham in its role as project director for the PRI. Graham is focused on his objectives and extremely professional. I look forward to work with him again.” -Managing Director, Hedge Fund-of-Funds, Zurich, Switzerland




“Graham is a bright, talented and knowledgeable individual. His passion and enthusiasm for the UN PRI work was inspiring. Graham is results-oriented and an effective communicator. It was a pleasure working with him.” Asset consultant, leading global asset consulting firm, Portland, Oregon, USA.




“Graham's energy, networking and strategic thinking has helped the UN Principles for Responsible Investment build incredible momentum in non-traditional financial centres.” - Project Manager, PRI, Sydney, Australia.




“Graham was extremely helpful in steering Harvard Business School students with expertise in CSR. As a co-VP for CSR among MBAs at Harvard Business School, I strongly recommend tapping into Graham should you need any insights in CSR or social responsible investments.” - global industry analyst, major US asset manager, Boston, USA.

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