We started Carbon Collective because we wanted to find the best green investment funds for our retirement accounts. We looked at the top sustainable ETFs and best ESG mutual funds, but the best strategy we could find ended up not having a direct focus on sustainability.
Instead, our “Ah-ha!” moment came when we looked at the carbon footprint of each sector of the stock market. High-carbon sectors, like utilities, produce 180x more CO2e (carbon dioxide equivalent) per dollar invested than low-carbon sectors, like healthcare or technology.
So, let’s dig into the math of why using stock market sector index funds is one of the best green investment strategies. Also, you can check out how we build our full, diversified climate friendly portfolios.
There are multiple ways to group the thousands of companies in the stock market. You can group by size (S&P 500). You can group by location (national vs. international). Or, you can group by stock market sector, lumping companies together by category based upon their product or service.
This last approach nicely groups the public companies with high carbon emissions together.
The four high-carbon sectors are: utilities, energy, materials, and industrials. In September 2020, these sectors represented 19% of the total stock market, but were responsible for 85% of its CO2e emissions.
The seven low-carbon sectors are: technology, healthcare, real estate, consumer discretionary, consumer staples, financials, and communications. In September 2020, these sectors represented 81% of the stock market and were responsible for 15% of the CO2e emissions from all public companies.
How did we get these numbers? Let’s walk through the math.
This is relatively simple. Fidelity has built a sector tracking tool for the 11 sectors traded on the New York stock exchange.
The total size of each represents all of the shares of every company in each sector, multiplied by their value (current trading price).
Most public companies hire a carbon analysis firm to tabulate their annual CO2e footprint. They publish these annually in their sustainability reports. Many companies use these numbers to set CO2e reduction goals and track their progress.
Until Fossilfreefunds.org came around, it was pretty challenging to get the full carbon footprint of an ETF (exchange traded funds) or mutual fund.
They partnered with ESG data analytics firm, Your SRI, to build a fund analysis tool. It searches through all the companies in a fund, pulls the CO2e data from each from Your SRI’s database, and multiplies them by how much of the fund each company represents.
This results in four pieces of carbon data on each fund. Let’s break them down quickly.
So which of these metrics do we use in our calculations?
We built Carbon Collective because we believe where you invest your savings matters. If you are investing for the long term, you tend to buy and hold a collection of stocks, impacting the global supply. You can slow down fossil fuel companies by divesting from their stock and speed up renewable energy companies by investing in theirs.
Therefore, we use the ownership principle. It relates a company’s current stock price to its relative carbon footprint.
Here’s the CO2e footprint per $1m invested for each sector:
You can scan through all our math and sources for every graph we post in this article here.
As you can see, the top sectors produce significantly more CO2e pollution per $1m invested than the bottom.
Not every sector is the same size, though. Remember, this number is calculated based upon the CO2e emitted per $1m of investment. In order to get to the true carbon emissions per market sector, we need to add back in market size.
We know the emissions per $1m invested in a sector (Fossil Free Funds). We know how many $1ms have been invested into each sector (Fidelity). So, to calculate the estimated CO2e footprint per market sector, we need to multiply them together. (Again, check out our full calculations)
As of 09/14/20, 18.91% of the total value on the stock market was responsible for emitting 85.11% of CO2e emitted by all public companies. See below for a full graph of all sectors sorted from the largest to the smallest on the stock market.
The largest sectors all have relatively small CO2e footprints. Let’s look at it in the other direction, from most polluting to least.
In modeling, after you get an answer, you often perform a gut or sanity check. This is an exercise to check your answer against some other source of trusted information.
So, how do our results compare to the real world?
We can perform a simple gut check by looking at the most polluting sector, utilities. According to our calculations, the total emissions from publicly-traded utilities per year is about: 1,517,600,000 metric tonnes of CO2e.
According to the US Energy Information Administration, the total carbon emissions from all utilities in the US is 1,870,000,000 metric tonnes of CO2.
Our calculation checks out. It’s in the same ballpark and is lower. We expected to see this as some utilities in the US are not publicly traded, like regional co-ops.
Whether you’re looking for the best green investment funds or the best traditional ones, selecting the right investment strategy involves trade-offs. No strategy is perfect.
Let’s explore the advantages and disadvantages of our sector-based approach to eco investing.
If you are looking for the best green investment funds, try looking at market-sector index funds. They offer a simple, inexpensive, and straightforward way to reduce 85% of the carbon footprint compared to a market index fund.
We use sector-based index funds as the foundation of our climate friendly investment portfolios. Checkout the next steps we take to construct climate friendly, diversified investment portfolios.