Quantifying the impact of ESG investing on climate change

In the course of researching ESG I’ve heard a statistic going around that switching pension funds has 27 times more climate impact than giving up meat and flying. It sounds great, but as a paraplanner I really need to understand the numbers people put in front of me. I decided to make like Tim Harford of Radio 4’s More or Less and find out where this number had come from. After all, if the effect of sustainable investing is this pronounced, that would be something worth proclaiming, and loudly.

A little bit of internet digging reveals the source of the stat is Swedish bank Nordea. The bank’s sustainable investment arm conducted an analysis of the carbon footprint of savings and investments, publishing the results in June 2018. All the number crunching was peer-reviewed by Dr Ben Caldecott of the University of Oxford, so that’s solid. However, he didn’t review the methodology used to generate the data input into the calculations – e.g. investment amounts, time period, assumed growth rates. As all good paraplanners know, when running calcs rubbish in = rubbish out so I still wanted to find out more.

Looking under the bonnet, the analysis considered the difference between investing the average Swedish pension contribution (2.5%) of the average Swedish gross salary (32,800 SEK a month) into a default pension fund, which includes investments in companies with significant fossil exposure, versus making the same investments into a fund without significant fossil exposure, over the average Swedish working lifetime (42 years). Assuming both funds grew at 9.3% a year, they calculated the overall carbon saving would be around 2,200 tonnes of CO2 emissions. This is around 27 times the total carbon saving likely to be achieved by reducing your shower time by two minutes per shower (1.06 tonnes CO2 emissions over the 42 year period), taking one less short-haul return flight a year (18.93 tonnes), taking the train instead of using a car over the average distance driven in Sweden each year (26.7 tonnes) and reducing meat consumption from the (Swedish) average to one portion per week (35.7 tonnes), combined. It is worth noting the authors of this study do not suggest you switch your pension funds instead of doing any of these things, but in addition to making other changes.

Nordea have made their own calculation of the carbon footprint of both funds, and that’s beyond my expertise to critique. However, what hit home for me was the compound effect of investing in lower carbon funds over time. Your time in the shower or distance driving a car doesn’t compound, it simply adds up. However, growth on your money does when it’s held in a pension not being touched. This is what makes the huge difference over the 42-year period used in the study.

The headline impact, then, of 27 times the effect of the other actions, relates to regularly investing in low carbon funds right from the start of a 42-year working life. Switching into fossil-free (or -lite) funds later in life would have less of an impact, especially if contributions were not continuing. Because the massive difference is due to compound growth, investing in lower performing funds would also reduce the relative impact (the annual growth rate of 9.3% used in the calculations seems high to me, although this is apparently the average annual return of the default (fossil-heavy) fund). That is to say, not every investor can expect to achieve the headline rate of 27 x climate impact, or 2,200 tonnes CO2 saved, simply by switching their pension funds. 

Regardless of this, the purpose of the study was to illustrate that an individual’s savings and investments have a significant impact on their carbon footprint, even though they are not usually taken into account when doing a traditional carbon footprint analysis. I think the case is well-made on this point, and climate-conscious investors (and advisers) should take note.

If you’d like to learn more about ESG, register for EBI’s online workshops and discover the fundamentals of ESG investing, how to present ESG to clients, and how the upcoming MiFID II regulations may impact your business.

For more information on the topics covered in this article:

https://www.nordea.com/en/sustainability/sustainability-news/nordeas-illustrative-analysis-on-carbon-footprint-from-savings.html

https://nordeainvestmagasinet.dk/sites/default/files/inline-files/Regnestykke-baggrund.pdf

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