A Framework for Attributing Changes in Portfolio Carbon Footprint

Abstract

Tracking a portfolio’s emissions profile over time is a key requirement for any type of climate-aware investment strategy. The challenge in tracking those profiles is that climate metrics are influenced by not only the emissions of companies in the portfolio but also portfolio managers’ decisions, as well as other financial variables such as weights in the portfolio or companies’ enterprise values. In this article, the authors develop an attribution framework that allows investors to disentangle these effects. They focus on financed emissions, which aggregate greenhouse gas emissions “owned” by a portfolio’s holdings, and financed-emissions intensity, which adjusts financed emissions by dividing it by portfolio value. Their approach is to first calculate contributions by looking at changes in a specific input variable while keeping all other input variables constant. Next, they account for effects of simultaneous changes. The results are organized in an attribution tree that allows for a systematic drill-down into the different effects.