Carbon Handprints

A New Approach to Climate-Focused Equity Investing

28 March 2022
2 Minute Read

What You Need to Know

How can investors gain confidence that an equity portfolio is invested in companies that are really helping to address climate risk? Focus on a company’s carbon handprint, which measures the positive impact, or carbon avoided, by using its products. By combining an assessment of carbon handprints with research of business fundamentals, we believe investors can create a portfolio of companies with superior long-term return potential that are providing solutions to the world’s biggest climate challenges.

$4.3 trillion
Estimated global annual investment required in 2030 to pursue a net-zero world by 2050, according to the IEA
60%
Less carbon emissions generated by an electric vehicle versus a similar internal combustion engine vehicle
24.8 million metric tons
Amount of carbon emissions reduced annually over the next 20 years from the use of Vestas wind equipment installed in 2020
Authors

Investors are strengthening their commitment to help combat climate change. But as inflows to climate-focused funds accelerate, more questions are being asked about the investing approaches of these portfolios.

What type of companies are held in climate-focused portfolios? Can you fully assess a company’s impact on the environment by looking at its carbon emissions metrics alone? And how does a climate-focused fund contribute to global efforts to accelerate decarbonization?

Investors often seek simple metrics to determine which companies are “good actors” in the fight against climate change. The most common metric for evaluating a company’s environmental impact is the carbon footprint—total greenhouse gas (GHG) emissions generated by business activities. But a carbon footprint doesn’t tell the whole story of a company’s impact, and can also be misleading. There are many other ways for companies to promote a transition to a low-carbon world that simply won’t register in carbon footprint data. And there are many ways for companies to lower a carbon footprint that don’t help in tackling climate change.

So how can investors gain confidence that an equity portfolio is invested in companies that are really helping to address climate risk? Instead of focusing exclusively on a company’s carbon footprint, we believe investors should look at a company’s carbon handprint. In contrast to a carbon footprint, which measures the negative impact of a company’s operations on the environment, a carbon handprint measures the positive impact, or carbon avoided, by using a company’s products. These products represent the positive solutions to global climate challenges created by a company. From clean energy to recycling, transportation to energy efficiency, diverse companies with a big carbon handprint are making major contributions to solving the world’s climate crisis.

Applying the Carbon Handprint Principle

There are different ways to quantify a carbon handprint for each solution group. But across solutions—among them agriculture, clean energy, transportation and energy efficiency—the unifying principal that anchors our analysis is how much carbon is avoided.

This metric becomes the lens for identifying and evaluating a carbon handprint. For example, clean energy companies will be judged on the amount of zero-carbon energy generated, while resource efficiency companies are ranked on their ability to save energy for other companies and entities.

In this paper, we present case studies that show how to apply a carbon handprint analysis. Consider Schneider Electric, a French multinational company that provides energy management systems to help buildings, data centers and industrial facilities reduce their emissions. These technologies helped companies avoid 45 million metric tons of CO2 emissions in 2020—85 times more than Schneider’s emissions during the same year (Display). Vestas Wind Systems, a Danish manufacturer of wind turbines, generated 73,000 metric tons of CO2 through its manufacturing processes in 2020, but will enable its customers to reduce carbon emissions by 45 times more than that annually over the next 20 years.

Disclosure of carbon avoided is not an industry standard. As a result, investors can’t rely on company reports or third-party rating agencies to understand how much carbon is avoided through climate solutions. By actively engaging with management and conducting independent research, we believe investors can obtain the information needed to measure a company’s carbon handprint accurately and convincingly. Establishing a clear carbon handprint metric allows investors to assess how a company is contributing to the fight against climate change, and how its contribution is evolving over time.

Carbon Handprints Point to Real Climate Solutions
Ratio of Carbon Handprint to Carbon Footprint

Past performance and current analysis do not guarantee future results.
As of December 31, 2020
For Schneider Electric: 45 million metric tons of CO2 emissions avoided in 2020 from energy efficiency savings from its energy management and automation products vs. 527,000 metric tons emitted during 2020 (scopes 1, 2 and 3). For Vestas: carbon avoided by a wind turbine over its lifetime vs. carbon emitted during manufacturing, transporting and installing a wind turbine. For Neste: renewable transportation fuel enabled customers to reduce GHG emissions by 10 million metric tons in 2020. Neste’s carbon emissions were 2.9 million metric tons in 2020.
Source: Company reports and AllianceBernstein (AB)

Past performance, historical and current analyses, and expectations do not guarantee future results.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.


About the Authors