WALKING THE WALK - How To build A Carbon Neutral Portfolio

" Innovation drives economic growth, and will be the driving force behind new technologies which deliver a global economy that can still grow at a health clip, whilst not costing the earth. "

- ARIA Capital Management -

We are a committed agent of change. Actions speak louder than words, and we believe we are demonstrating our climate stewardship credentials by offering a carbon neutral portfolio. This commitment is underpinned via our our revenues, by financially comitting to offset all of the CO2 embedded within the GIIF portfolio.

GIIF has been designed to allow climate conscious investors satisfy their desire to own carbon neutral investments, on a fully transparent look through basis, without having to sacrifice the quality of the companies we believe will optimise returns.

The following article spells out just how we have sought to achieve this in greater detail.

Carbon Neutral Investing

Innovation drives economic growth, and will be the driving force behind new technologies which deliver a global economy that can still grow at a healthy clip, raising the living standards of those who need it most, whilst not costing the earth. We hope that in some small part, our commitment to invest GIIF's management fees into high quality nature based carbon offset projects can also be seen as part of that wave of innovation that allows consumers of all budgets to contribute to the cause.

Worked Example:

GIIF currently is invested in Cleantech Company, and it owns 1% of the companies' shares outstanding. According to company disclosures, which we verify through various resources such as Bloomberg, Cleantech Company emits 1MTPA of CO2, on a scope 1 and 2 basis, throughout its operations.

Therefore, we calculate 0.01MTpa of CO2 emissions to the Fund's holding. In order then to compensate for those calculated emissions, ARIA's management fee from the Fund is used to invest into high quality carbon offsets to the order of 0.01MTp.a. Of course, we calculate the offsets required for the entire portfolio rather than just one of its holdings.

Advantages of such an approach:
Another approach could be to use the dividend yield of the underlying portfolio companies to finance the purchase of the high quality carbon offsets. We've chosen not to do that and use of some of the management fees to do so.

Such an approach allows us to target twin aims - without one compromising another. That's to say we can continue to identify the most attractive carbon mitigating opportunities and companies globally, without having to concern ourselves with reducing the yield on the portfolio. And of course, by extension, that means the Fund can continue to generate attractive income streams for investors, as it has done to date.

By rewarding lower carbon companies, and ensuring that Co2 intensity remains a cornerstone of the investment approach, and as that gains momentum across established institutions, will only serve to further increase the institutional reward, or capital, to carbon conscious enterprises. Quite often, the technologies are already existing, but corporate inertia is due to prohibitive costs.

Nature Based Offsets

There are a multitude of options available, priced from 15 USD per MT offset up towards 50 USD. As a firm, on the premise of the due diligence conducted to date, we prefer the higher cost projects, as we believe they are of higher quality. The following chart shows 20 companies, offering reforestation, or tree-planting initiatives, all of which been under review as potential nature-based offsets for investment.

Screen of c20 companies and charities offering nature-based CO2 removals, either via tree-plating, reforestation initiatives, or (less preferred) conservation.

Source: Rob West, TSE, ARIA

Bubble size denotes employee count. Blue = charities, green = private companies, yellow = public companies

What is a Nature Based Offset?

Projects such as we have considered seek to preferably reforest or plant certain trees grasses to increase carbon removal from the atmosphere. In essence, we are hoping to provide projects that can guarantee that should we commit up to 50 USD we are sure that 1 ton of carbon will be irrevocably removed from the atmosphere.

There are no guarantees, although we believe that with conservative carbon accounting, and reserves provisioned for, that is possible we can not just hold out, but also report to our clients, the expected carbon removed from the atmosphere from the enivronmental remediation that the investment into carbon offsets has increased.

Experts still diverge slightly on the amount of CO2 that is stored in any given forest, and for sure there is variability in assumptions, driven by the type of tree/plant, its geographical siting and its age for example. However, much as stock markets over the long term may return circa 7% on average, that is not a given every year.

Source: Rob West, TSE, ARIA

To be clear, the investment into natural carbon offsets does not have any impact on the Fund's performance at all. The monies subscribed into natural restoration projects transact entirely outside of the Fund's portfolio, although we will provide disclosures and reporting ongoing as to how and how much of the portfolio's emissions have been offset.

Advantages of our commitment

Much of the attention focussed on the roadma to a net zero economy centres around new technologies that can mitigate the carbon produced in our everyday lives. We have no truck with that, and it remains a core aspect of GIIF. However, the efficacy of nature based solutions in removing carbon from the environment is incontrovertible, and any funding that conserves the natural environment is to be encouraged to our minds.

Swimming with the Tide
Mother Nature is an awesome force. The International Plant Protection Convention, has it that the earth's natural photosynthesis processes are responsible for absorbing 440GTpa of CO2 each year, which is around 10x that of man made emissions.

Since pre-industrial times, the world has lost nearly a third of its forests - circa 5bn hectares. In itself their loss emits carbon into the environment - and accounts for nearly 1/3 of all man's emissions to date. Moreover, due to the natural degradation of forests, as they mature the pace at which they degrade merely offsets their natural 'carbon sink' properties. That's to say new forests remove more carbon than they emit, whereas ageing trees are less effective in the photosynthesis cycle.

A hydrogen project may have a cost that totals nearly 1000 USD per ton; a nature based offset below 50 USD, for a bio-diverse forest that can absorb between 200-400 tonnes of Co2 per acre. Any opportunity to restore the natural environment should be embraced.

" Since pre-industrial times, the world has lost nearly a third of its forests - circa 5bn hectares, and accounts for nearly 1/3 of all man's emissions to date. "

- ARIA Capital Management -

Addressing Calculation Concerns in Scope 1 and 2 emissions
We may have to accept that the portfolio may hold companies that use different methodologies for calcualting their scope 1 and 2 emissions. As we have discussed elsewhere, (here), there is a risk that Scope 1 and 2 emissions undercount the actual carbon emissions of a given company. The production of an Apple MacBook would entail significant plastics. However, it is likely that the producer of these plastics - no doubt a large petrochemical company, would be carrying the Scope 1 and 2 emissions there, rather than Apple reporting on them. (Were that not the case, there is the potential for double counting), however, should the portfolio include Apple rather and not the petrochemical producer, it is arguable that the true carbon cost is understated. To be clear, neither company is likely to feature in the portfolio and the example is illustrative, although relevant.

To address that we have sought to adjust the Scope 1 and 2 emissions, as we have described elsewhere - we seek to determine a 'carbon intensity' score for each investment, which we feel is a more inclusive number, and less subject to understating the reality.

Who should be responsible for footing the bill?
It's a contentious point as to who should pay for cost of carbon removal. Perhaps governments with tax revenues, or certainly with the end consumer of a given company's products or services. Should we have chosen to deduct the cost of the emissions offset from the portfolio's dividend yield then the decarbonisation of scope 1 and 2 emissions it would fall upon our clients. As an asset manager firmly committed to paying a pivotal role in the transition towards a carbon neutral world, we're very happy to divert our own resources to reducing emissions. We hope that's seen as walking the walk, in a world when many are accused of simply talking the talk.


For more information and answers to any questions you may have, please contact us.

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