The simplest way to reduce your carbon footprint

These days, we are constantly inundated with things that we shouldn’t do anymore if we want to save our planet. We should eat less meat, drive a hybrid or electric car, fly less, don’t go on vacations etc. And all of these measures are laudable if you want to reduce your carbon footprint. According to a 2013 study by Milena Buchs and Sylke Schnepf of the University of Southampton a two-person household in the UK had an annual carbon footprint of 21.4 tons of CO2 emitted. A family of four creates annual CO2 emissions of 28 tons. About one quarter of these emissions are due to electricity and heating and another quarter due to the cars we drive and the public transportation we use. By buying electric cars, insulating our houses and reducing our meat consumption we can potentially reduce the household carbon footprint by a quarter to half.

But have you ever thought, how much you can reduce your carbon footprint by changing your investment style? The chart below shows the reduction in annual CO2 emissions we can achieve if we switch £100,000 (c. $120,000) from a traditional global equity index like the MSCI All Countries World Index to an ESG Index or a dedicated low carbon index like the MSCI All Countries World Low Carbon Leaders Index. Switching £100,000 in equity investments into an ESG index reduces your annual CO2 footprint by 2.3 tons, or about the same as driving 10,000 miles in an average car. Switching to a low carbon index reduces your CO2 footprint by 8.4 tons – enough to offset your annual CO2 emissions from electricity and gas, as well as your food consumption and driving 10,000 miles in a car. 

Even if you don’t have £100,000 in equities to invest, you can substantially reduce your CO2 footprint by changing the equity allocation of your pension assets. If you have £100,000 in pension savings and you replace your international equity allocation with an ESG index tracker or a low carbon index tracker, then – given that the average defined contribution pension in the UK has allocated 45% to global equities – you can reduce your CO2 footprint by 1 to 3.8 tons per year.

Of course, if you invest £1 million into these indices, you could reduce your CO2 footprint by ten times as much which would offset a lot of business class flights across the Atlantic. If you are an affluent or wealthy individual with more than $1m in investable assets, the best way for you to reduce your carbon footprint is simply to change your investment portfolio.

Reduction of CO2 emissions by investing in ESG and low carbon indices

Source: MSCI, Buchs and Schnepf (2013), Carbonfootprint.com.

The funny thing is that this change in equity investments from a traditional index to an ESG index or a low carbon index doesn’t come at the cost of lower returns or higher risks. The chart below shows the performance of the MSCI All Countries World Index (ACWI) in comparison to the MSCI ACWI ESG Leaders Index and the MSCI ACWI Low Carbon Leaders Index since September 2007. No matter if we look at the Global Financial Crisis or the bull market of the last ten years, the indices had virtually the same performance with a tracking error of the ESG and Low Carbon Index relative to the ACWI of 0.5%. There are index funds and ETFs available in the UK that track both the ESG and the Low Carbon Index, so the change is easy to make. And you won’t regret it.

Performance of MSCI All Country World Indices

Source: MSCI.