Choking on Carbon

According to a recent report by George Mason and Yale universities, more than half of Americans (58%) believe climate change is mostly human-caused. As a result, more and more people try to manage the carbon emissions of their lifestyle. They buy electric vehicles or put solar panels on their roofs. Maybe they eat less beef and if they do buy beef, bring their own bag to the supermarket. Everything helps, but there’s one thing that really has a big impact on reducing emissions that receives little attention.

In order to explain this let’s go back to this past summer, when CDP, in conjunction with Climate Accountability Institute, released a report detailing that 100 companies have been responsible for ~71% of the world’s greenhouse gas emissions.

That’s a staggering number. As a public equity portfolio manager at Stance Capital, and focused on sustainable investment strategies, my first thought was to wonder if it would bother U.S. investors, be they individuals or institutions, to know that firms such as Exxon, Chevron, and ConocoPhillips are both on the list and lurking in the index funds in their investment portfolios. To be sure, some investors could care less, but in a world increasingly dominated by news cycles devoted to record temperatures, Cat-5 hurricanes, floods, drought-fueled fires, and so on, my bet is that many investors, already taking steps in their personal lives to reduce their carbon footprints, would like to better understand their portfolio’s relationship to carbon emissions.

So here is the math. The average American family of three has a carbon footprint of around 48.5 metric tons according to CoolClimate Network. You can play around with the calculator here. Wealthy families have higher footprints. More cars, airplane trips, and so on.

A family might have $100,000 invested in an S&P 500 index fund, which is a cost-effective way to get exposure to U.S. large-cap value and growth stocks. Since the market cap of the S&P500 is a knowable number at $19 trillion, then that $100,000 investment is a calculable fraction of the index.

It turns out that the direct and indirect carbon emissions of the S&P 500 are also a knowable number. Earth on Edge, a collaboration between PBS and World Resources Institute estimates the S&P500 has a carbon footprint of 4,300 million metric tons of emissions. To bring all of this together, when someone invests $100,000 in an S&P500 index fund, they own an additional 22.7 metric tons of carbon.

Each and every year.

So instead of changing showerheads and light bulbs, the most impactful way for an investor to lower their true carbon footprint is to consider shifting from S&P500 index funds to actively managed funds with lower carbon exposures.

Bill Davis
Founder and Portfolio Manager
Stance Capital