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Daily CSR

Daily CSR
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Carbon Handprints and Climate Change


Carbon Handprints and Climate Change
Measuring Carbon Footprint through positive climate contributions
According to a study released at the recent UN COP27 climate conference, the world has nine years to improve carbon emission trajectories and avoid catastrophe. At COP27, global warming experts stated that reducing carbon output alone is no longer sufficient to achieve long-term net zero1 goals. More and novel approaches, particularly prevention, are urgently required.

Investors should consider carbon handprint to understand how carbon emissions prevention and avoidance work in industries. GHGs produced by a company's activities across its operations and third parties are measured as its carbon footprint. 2 Carbon handprint, on the other hand, measures the emissions avoided by other businesses that buy and use products and services that represent positive solutions to global climate challenges.

Diverse companies with a large carbon footprint are making significant contributions to resolving the world's climate crisis, from clean energy to recycling, transportation to energy efficiency. An in-depth study conducted by our equity colleagues demonstrates how companies with carbon footprints that outweigh their carbon footprints (the emissions generated by manufacturing their products) provide powerful solutions to the world's climate challenges.

Carbon footprint brings a new dimension to climate-conscious fixed-income investing. It's yet another indicator of an issuer's positive impact on the environment. It also strengthens the framework for standards used by managers to score specific ESG-labeled issues, particularly green bonds. With a clearer picture of a green bond's potential, managers can weigh the value of its greenium, or the negative yield between a company's green and conventional issues.

Using Carbon Handprints to assess assets
Although the carbon footprint is still underappreciated, we find the information it provides about a company's GHG output useful across the fixed-income spectrum. There are various methods for calculating a carbon footprint for various types of climate solutions. However, the overarching principle that underpins our analysis is the amount of carbon avoided. This metric serves as a lens for identifying and assessing a carbon footprint. Clean energy companies, for example, will be evaluated based on the amount of zero-carbon energy generated, whereas resource efficiency companies will be evaluated based on their ability to save energy for other companies and entities.

Handprints can be left by the major construction of a new green-certified factory, or by the simple installation of energy-efficient lighting, and everything in between. Solar and wind power, thermal insulation, and electric vehicles (EVs), according to AB, will have the greatest impact on GHG avoidance by 2030—in other words, the largest carbon footprints.

The carbon handprint is expressed in metric tons of CO2 avoided or prevented, revealing whether an issuer produces more carbon than it avoids. For example, each metric tonne of CO2 emitted during production by a thermal-insulation manufacturer results in 200 metric tons of avoided carbon output for its customers, an impressive 200:1 handprint-to-footprint ratio. Ratios can vary greatly, particularly between company types, but also within sectors. As a result, a company's relatively minor differences in handprint-to-footprint ratio can still represent a significant contribution to carbon avoidance within its industry.

Valuing economic values of Carbon Handprints  
Our research also shows that the cost of reducing or avoiding carbon emissions varies greatly depending on the product and industry. Carbon fiber, for example, is by far the cheapest material to implement in commercial jetliner production, owing to its superior strength and energy-saving lighter weight. Meanwhile, biofuels and cold storage are currently much less cost-effective ways of increasing carbon footprints. However, with future innovations likely, we believe their costs will fall over the next decade, along with the costs of adopting electric vehicles and green building materials, which are currently high but may fall.

Carbon-reduction costs have far-reaching implications for fixed-income research, and not just in carbon-intensive industries. Companies of all sizes may want to reduce their carbon footprints, but implementation costs must be considered. Companies are increasingly turning to lower-cost carbon-footprint solutions such as LED lighting, thermal insulation, and carbon fibre. We believe AB's cost research assists in identifying businesses that will benefit from the demand.

Carbon Handprints and bonds
Carbon handprint, as a comparative tool, can broaden a climate-conscious bond investor's perspective when screening for opportunities, particularly among green bonds, which require a materially more detailed disclosure that allows investors to compare carbon footprints and handprints more granularly. Brookfield Renewable Partners and Star Energy, for example, are two issuers with highly credible green bond frameworks and environmentally friendly assets. They both provide renewable energy and advocate for climate change mitigation. However, a two-tier analysis reveals that one has a larger carbon footprint.

Based on green bond proceeds and annual output, Brookfield's investment per unit of energy produced is slightly lower than Star Energy's, and its emissions (carbon footprint) are 24% lower.

However, when you dig a little deeper, Star Energy has the larger carbon footprint, including over 700,000 more metric tons of avoided CO2 output per year, which it achieved at nearly half the cost per ton compared to Brookfield. This results in a handprint-to-footprint ratio of 110:1.

We've come a long way in bringing nations together to work toward common climate goals, but the general takeaway from COP27 is that global warming is still a serious threat. Companies must play their part if economies are to thrive.

To meet corporate net zero targets on time, we believe that spending on decarbonization technologies will need to grow exponentially over the next decade. This massive spending will benefit companies that offer decarbonization solutions that not only reduce emissions internally, but also avoid them throughout the value chain, providing attractive investment opportunities for fixed-income investors.