How to take your portfolio carbon neutral

Written by Josh Gregory on 21st Sep 2021

As a Good With Money reader, you’ll be well versed in the importance of sustainable finance. A greener financial system is now seen as a critical component in the fight against climate change.

But when it comes to our investments, there’s almost too much choice. DIY investment platforms publish lists of sustainable funds to choose from; wealth managers offer to shift you to a more sustainable portfolio; and specialist digital platforms display the latest trends in clean, green investments.

You might also be surprised to find out that some sustainable investments have a relatively high carbon impact. Why might that be?

Sustainable firms can still have a high carbon impact

Many popular green funds include companies producing ‘climate solutions’ – the products and services that other parts of the economy need to decarbonise. Good examples include producers of energy-efficient heating/cooling systems, home insulation and meat alternatives. They may be responsible (indirectly) for reduced emissions elsewhere but have a higher carbon impact themselves.

You might also come across ‘transition’ companies. These are companies, often in polluting industries such as construction, transportation and steel manufacturing, that are rapidly decarbonising their activities. The transition from ‘brown’ to ‘green’ is vitally important for the economy, but including these companies in your portfolio would substantially increase its carbon impact. For example, an investment in the energy sector has, on average, over 250 times the carbon impact of an investment in tech.

What about offsetting?

So your portfolio has a higher carbon impact for legitimate reasons. Is there anything you can do to manage it? One answer – offsetting – might be controversial to some.

The main criticism is that offsets are a ‘greenwashing’ tool, used by companies claiming to be carbon neutral while they carry on polluting activities.

While this may be the case in some instances, it’s not universally true. There are plenty of responsible companies working hard to reduce their carbon impact (for example, the transition companies we discussed above). These companies will use offsets as the ‘last mile’, to reduce any remaining impact that’s impossible to strip from their processes.

There’s also a concern that some carbon credits fail to deliver the environmental benefits they promise. Fortunately, there are internationally recognised certification programmes that verify the quality of carbon credits. To receive proper accreditation, offset projects must demonstrate they are delivering real long-term environmental improvements, supporting the socio-economic development of local communities and, often, aligning with the UN’s Sustainable Development Goals.

So long as carbon credits have received accreditation from organisations such as Verra and CCBA, investors can be reassured they’re the real deal.

A fair cost for positive climate action

Importantly, an investor choosing to offset their own impact doesn’t give the companies a free pass. Rather, by taking action to check and optimise their impact, investors become armed with knowledge and can put additional pressure on companies to decarbonise. And while offsetting is an overhead – between 0.25 per cent and 0.5 per cent of a portfolio’s annual returns, on average – many investors see this as a fair cost when it allows them to take positive climate action.

Sugi is an app that enables UK retail investors to check their climate impact, compare investments and take action to build a greener portfolio. It has recently launched a new feature for users to offset their investment impact with verified carbon credits.

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