Climate problem and industry ownership

How much of the climate problem does the investment industry own?

Assessing how much of the annual global greenhouse gas emissions the investment industry ‘owns’ feels like a necessary first step towards addressing the climate problem.

Finding the investment industry’s ‘ownership’ of emissions requires some assumptions, which can clearly be challenged. Arguably, a more accurate way to quantify the investment industry’s emissions would be bottom-up, aggregating all the emissions from all the assets owned. However, there are substantial data challenges with this approach, including the problem of cross ownership of shares. For this we tolerate some rough justice implied by simplifying assumptions and assume:

  • The investment industry owns the entirety of all listed companies (it is actually a large subset, so we are over-counting)
  • Corporate bonds are only issued by listed companies (this assumption allows us to ignore corporate bonds; we do not know in which direction the inaccuracy of this assumption would affect the results)
  • Lending money to sovereigns (buying their bonds) does not make the investment industry responsible for public sector emissions
  • Allocations to real estate and private equity are relatively small and therefore the emissions can be ‘covered’ by the over-counting within assumption #1.

In short, these assumptions allow us to proxy the investment industry’s emissions by simply considering a global equity index, for which aggregate data exists. If we consider the MSCI All Country World Index, then current ghg emissions (scope 1 and 2) are currently around 6.4 billion tonnes.

Another heroic assumption is that the scope 3 emissions (largely attributable to the use of sold products) are the same size as the scope 1 and 2 emissions. From informal conversations with industry peers it appears that the range of estimates for the size of scope 3 emissions is wide, from the lowest being around 50 per cent of scope 1 and 2 to the highest being in excess of 100 per cent. I’ve assumed something at the upper end of the range.

It follows that public investor-owned companies produce around 12.8 billion tonnes of annual greenhouse gas emissions. Total greenhouse gas emissions are around 50 billion tonnes (source: and investment is therefore responsible for 25 per cent of all emissions (12.8/ 50 = 25.6 per cent).

Relying on assumptions is more comfortable the more confident we can be that they are reasonable. To this end, we looked for evidence to corroborate this result and used a CDP report from 2017. Using data for 2015, CDP attributed 30.6 billion tonnes of greenhouse gas emissions to 224 fossil fuel extraction companies. This is approximately 60 per cent of total emissions (30/50). In essence they have attributed back emissions from all other sectors (ie scope 3 activity). This is very pragmatic in terms of simplifying the number of companies to engage with, but is it reasonable? We can check in two ways:

  • Getting close to the 25 per cent number derived from the MSCI ACW Index
  • Satisfactorily explaining the ‘missing’ 40 per cent of emissions.

CDP state that of the 30.6 billion tonnes, 30 per cent came from public investor-owned companies, 11 per cent from private investor-owned companies and 59 per cent from state-owned companies (2015 data so pre-Saudi Aramco’s IPO). I assume all of the 11 per cent private sector is attributable to institutional investors, but this is likely an overstatement. It follows that the investment industry is “directly” responsible for about 25 per cent of annual emissions [(30 per cent + 11 per cent) of 60 per cent].

The second test relies on us combining other data sources, as illustrated in the table.

Investment industry25%CDP Carbon Majors Report 2017
State-owned fossil fuel companies35%CDP Carbon Majors Report 2017
Agriculture15-25%Food Climate Research Network
Post-farm food system is a further5-10%but a proportion of this is likely accounted for in top 2 rows
Wildfires5-10%inside climate news
Figure for 20 years to 2017; new records for wildfires have been set over the following years
Other5%+A catch-all covering waste, deforestation, melting permafrost and other activities

I am satisfied that the missing 40 per cent of emissions is sufficiently explainable and conclude the CDP approach is very reasonable. However, I readily acknowledge the inaccuracies in this approach; the data is not as certain as we would wish.

Does owning a problem lead to solving the problem?

What the investment industry does with the conclusion that it owns 25 per cent of the problem is far from certain. It will depend on a number of considerations:

  • What capacity do industry organisations have to contribute to a solution? (ability)
  • What should be the extent of the contribution – minimum, fair share, generous? (extent)
  • Do industry organisations have a moral incentive to contribute? (intrinsic motivation)
  • Is the solution likely to be profitable, reducing fiduciary duty concerns? (extrinsic motivation)

So what should be the extent of the contribution? Is the minimum contribution to do nothing, and leave the problem for governments and investee companies to sort? Is the investment industry’s fair share to solve 25 per cent of the problem? Or, given that wildfires and melting permafrost are not going to amend their ways and provide their fair share of the solution, is it a higher number? And is being generous even possible when bound by the requirements of fiduciary duty? All of these questions imply autonomy, but that is not a given.

The inevitable policy response could introduce compulsion, and if that is combined with cynicism regarding the realism of required actions, we could find ourselves in a pretty toxic industry culture. Better, in my opinion, to get out ahead and start on some meaningful actions while they remain voluntary.

First published on top1000funds

Tim Hodgson