BNP Paribas Asset Management:  Explaining Portfolio Decarbonisation

16 nov 2018

Isabelle Bourcier, Head of Head of Quantitative and Index-based Management at BNP Paribas Asset Management

So what is decarbonisation – that odd, but strangely attractive-sounding word? Decarbonisation refers to action taken to reduce the carbon intensity, and carbon dioxide (CO2) emissions in particular, of an economy. As an integral part of the energy transition, decarbonisation is part of the fight against global warming and its impact on the planet.

In terms of portfolio management, decarbonisation comes under sustainable and responsible investment. In a first step, the carbon footprint of an investment portfolio is measured by calculating the CO2 emissions generated by the activities and products of the companies in that portfolio. Next, the portfolio’s exposure to the companies with the biggest carbon impact is reduced and its exposure to those offering energy transition solutions is increased.

To prevent the total exclusion of particular sectors, investments concern those companies with the lowest emission levels, while shares in companies with very high emission levels are kept to a minimum. A decarbonisation strategy directs investments towards the companies making the greatest efforts to reduce their CO2 emissions and pushes the biggest emitters to take action to reduce their environmental impact.

Encouraged by the Paris Agreement, which aims to keep global warming to well below 2°C by the end of the century, an increasing number of investors is taking a close interest in corporate strategies for a low-carbon world. Shareholder pressure is growing on businesses that are highly exposed to the risk of transition to a low-carbon economy and ever more shareholder coalitions are using their muscle to encourage the most carbon-intensive companies (fossil fuels top the list) to change their business models.

As global warming flagships, oil companies have been the first to be affected. In 2015, almost all the shareholders of the two biggest companies in the sector demanded greater transparency of the impact carbon risk would have on their holdings. In 2017, another industry heavyweight was told to assess the financial impact of the energy transition on its business.

In 2015, over a hundred investors representing more than USD 10 000 billion decided to measure and publish the carbon footprints of their portfolios. Two initiatives translate investor efforts in this field into formal action: the Montreal Carbon Pledge and the Portfolio Decarbonization Coalition, both launched by the Principles for Responsible Investment (PRI) and UNEP FI (United Nations Environment Programme – Finance Initiative).