Carbon footprint: How do our portfolios compare?

Zach Stein

We started Carbon Collective because we wanted to build the greenest investment portfolios possible (while still being diversified, with low fees). 

So, what was our measuring stick? 

Our goal is to help you align your savings and investments with the world where we solve climate change. So, we focus on the relatively straight forward metric of carbon footprint (more specifically, carbon dioxide equivalent — CO2e).   

In our analysis below, we wanted to see how the collections of stocks in our climate friendly portfolios compared against a series of other investment options you may have looked at: Betterment’s standard portfolio, Betterment’s socially responsible portfolios, Wealthfront’s standard portfolio, a US-only portfolio of Vanguard index funds, and a global portfolio of Vanguard index funds. 

Read on to see the results (spoiler: our portfolios are a lot lower). If you’re curious, you can learn more about how we build our climate friendly portfolios.

Our Data

Where we sourced the carbon data

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. Now, Fossil Free Funds makes it easy to access carbon data for mutual funds and ETFs. Check out some of the funds you are invested in.

We include links to each fund’s page on Fossil Free Fuel in our model. The numbers do change as the holdings in the funds change, so our results below will slowly get out of date. 

The metric we use to measure the carbon of each fund is its carbon footprint, which is calculated under the “ownership principle.” This principle supposes that if you own 1% of a company, you own 1% of the carbon pollution it emits. The numbers you see on Fossil Free Fuel calculate the carbon footprint of owning $1 million of shares of that fund. 

There is a second common carbon metric called carbon intensity. Carbon intensity looks at the relationship between a company’s carbon emissions and its revenue. It’s a useful way to roughly see how dependent upon burning fossil fuels a company is for its business. 

In general, we favor using carbon footprint and the ownership principle in our calculations. With our climate friendly portfolios, our goal is to help you use your stock, your ownership of these companies, to slow down fossil fuel expansion and speed up renewable energy and the other companies building climate solutions.

What about bonds?

One place that the ownership principle does not apply is to bonds. Bonds are essentially IOU notes that a company, government, or municipality will issue to raise capital to pay for projects that will generate a return. Creditors will fund these bonds because they want to receive a fixed income of interest payments (and eventually the return of the original amount loaned). 

Therefore, carbon footprint under the ownership principle does not make sense for bonds as they are a debt, not equity, instrument. 

For some bonds, carbon intensity is a useful metric. This is especially true for corporate bonds where your debt is being used to expand their corporate activity. When you buy a bond from a fossil fuel company, you are betting on it being able to turn your loan into profit and give you back interest. 

Most of the bond funds that we look at in this comparison from other companies are largely corporate, so they have carbon intensities. 

But we do not include any corporate bond funds in our portfolios. We could not find one that did not include bonds from fossil fuel companies. Instead, we use US-treasury and green bond funds, both of which have issues with carbon intensity. Let’s explore them.  

US-treasury bond funds just don’t have carbon intensity metrics associated with them. This makes sense. The federal government is not a business. We have searched high and low for a comparable number, such as the total carbon emissions from the federal government over the total federal debt, but have not yet found this. (If you happen to be an economics academic who is looking for their next research topic, this would be awesome). 

Then, unlike US-treasury bonds, green bond funds do have a carbon intensity number, we just think it’s incorrect. Both VanEck and Blackrock do provide carbon intensity numbers for their bond funds (they actually are quite high). Why do we think they’re wrong? 

Carbon intensity measures the overall activity of a given company. Green bonds are used to fund a specific green energy or pollution prevention project within a company. Even if the company currently has high emissions, your savings are helping it actively lower them. The project you’re funding likely has a negative carbon impact over time.

In short, the right data doesn’t exist yet to fairly compare our bond portfolio’s carbon intensity to the other portfolios we explore here. For the sake of transparency, we do include the carbon intensity of each bond fund in our model, but we cannot yet draw conclusions from them. 

Where we sourced portfolio allocations

Neither Betterment nor Wealthfront posts their exact portfolio allocations. Therefore, we use a 3rd party source for them. We don’t believe this has a major impact on their carbon numbers, but we want to call it out. 

  • Betterment standard
  • Betterment socially responsible. This was the portfolio we had to take the greatest leaps on in our calculations, eyeballing the allocations from a graph they provide. Not great, but the margin of error is pretty small in the final calculation. 
  • Wealthfront standard
  • Vanguard US-only. We calculated these ourselves using VTI to represent the total US stock market and BND the total us bond market.
  • Vanguard global

A couple other assumptions we make in modeling:

In order to calculate these models, we also needed to make a couple of assumptions regarding Carbon Collective’s portfolios. 

  • The Drawdown Index has a neutral carbon footprint. Our climate friendly portfolios are built like index funds, but with the four high-carbon sectors of the stock market replaced with a collection of the 112 companies solving climate change. About 19% of our stock portfolio gets invested in this collection. What is the carbon and intensity footprint of this collection?

    It is likely negative, given the prevalence of renewable energy in the index. For the sake of simplicity and conservative modeling, we call it zero.
  • Our portfolio’s consumer staples footprint is the same as its parent ETF. For most of the low-carbon sectors, we just bought a sector index fund ETF. Not for consumer staples. Our portfolio recreates the index but removes meat and tobacco companies.

    For the sake of simplicity we use the carbon data from the parent ETF, FSTA. Given that meat companies have a high carbon footprint, we think this is also conservative from a modeling standpoint. 

Results!

Check out the results of our carbon footprint comparison. If you want to double check, here’s our math

Carbon footprint

When you own stocks through Carbon Collective’s stock portfolio, the amount of carbon pollution you “own” is:

  • 15x lower than Betterment’s standard portfolio 
  • 11x lower than Betterment’s SRI portfolio,
  • 7x lower than Vanguard’s index fund of the total stock market

Carbon intensity

In total, the Carbon Collective stock portfolio has an average carbon intensity that is: 

  • 10x lower than Betterment’s standard portfolio 
  • 7x lower than Betterment’s SRI portfolio
  • 7x lower than Vanguard’s index fund of the total stock market

The companies in Carbon Collective’s stock portfolio generate a lot less CO2e for each dollar of revenue they bring in. 

Conclusion

That’s how we analyze . Again, please check our math and shoot us an email if you think we got anything wrong. 

As we prioritize and accelerate decarbonizing our society, we’ll see the carbon footprint and intensities of all of these portfolios fall. 

Part of the way you can make that happen faster is aligning your savings and investments with your values around climate change. We want to help.

Collectively, we can make a difference.

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