As more clients take interest in environmentally friendly investments, providers of new products are buying credits to offset the greenhouse-gas emissions of companies held in their portfolios.
While carbon offsets play a role in reaching net-zero emissions targets, some advocates of responsible investing say focusing on offsets rather than reductions may be a “simplistic” solution.
Toronto-based Evolve Funds Group Inc., Ninepoint Partners LP and Purpose Investments Inc. have launched ETFs in recent months that offset their holdings’ carbon emissions. Evolve’s funds use broad indexes as a starting point, Purpose’s ETF is focused on clean energy companies and Ninepoint seeks to offset emissions related to its investments in Bitcoin.
The ETFs use third-party data providers to determine the carbon footprints of their portfolios. Then, the funds purchase credits for certified carbon offset projects to counter emissions and subsequently retire those credits (i.e., remove them permanently from the market). The cost of purchasing the offsets is included in fund fees.
Evolve president and CEO Raj Lala said carbon offsets are an alternative to more complex environmental, social and governance (ESG) screening methods that sometimes leave investors “scratching their heads.” There are no standards for what constitutes an ESG or sustainable fund, which has led to accusations of “greenwashing” or attaching an environmentally friendly label to a fund that doesn’t live up to the billing.
Investors can be confused or disappointed when they purchase an ESG ETF that turns out to have a major oil company among its top holdings, for example.
“The lack of clarity around screening processes was one of the reasons we decided to launch these,” Lala said, referring to the Evolve S&P/TSX 60 CleanBeta Fund (TSE:SIXT) and the Evolve S&P 500 CleanBeta Fund (TSE:FIVE), both of which began trading on the Toronto Stock Exchange in May 2021.
Screening limits an ETF’s investable universe. The two Evolve funds offer the broad U.S. and Canadian indexes minus the cost of offsetting the holdings’ emissions.
Ninepoint’s decision to buy offsets for the Ninepoint Bitcoin ETF (TSE: BITC.U) was based on a similar premise. “Bitcoin has a reputation for being a heavy emitter as an industry,” said Alex Tapscott, managing director of Ninepoint’s digital asset group.
As of September 2021, the Cambridge Bitcoin Electricity Consumption Index showed that Bitcoin activities consume about 97 terawatt-hours of electricity annually — more than the Philippines does. Tapscott said that roughly half of the energy used in Bitcoin mining is from renewables, “but half of a big number is still a big number.”
In August, Calgary-based Accelerate Financial Technologies Inc. also launched an ETF (TSE:ABTC) that seeks to decarbonize Bitcoin emissions.
However, not all investors want to include heavy emitters in their portfolio and then buy the carbon offsets. For many ESG-conscious investors, reducing the amount of emissions produced in the world and changing companies’ behaviour is part of the bargain.
Marie-Justine Labelle, head of responsible investment with Desjardins Investments Inc., called offsets “a simplistic solution to what is a very complex issue. It removes the onus on the investing companies to take ownership of their carbon-reduction journey.”
Labelle called offsets “a powerful tool” that need to be used with care. The Paris Agreement called on countries to reach net-zero emissions by 2050 and limit global warming to 1.5°C above pre-industrial levels. In 2021, the International Energy Agency stated that to reach net-zero goals, there can be no new fossil fuel-related projects or coal-fired power plants, and that concentrating on offsets could divert efforts from reducing emissions.
“The idea that you’ve offset the negative contribution to climate change in your portfolio by buying carbon offsets does not reflect the full story,” Labelle said, not referring to particular funds. In many cases, she added, investors could be “offsetting the emissions of projects that should not be happening in the first place.”
Lala said that in a perfect world, all the companies in the major indexes that the Evolve funds track will have net-zero emissions; by 2050, investors would just be buying the indexes and no offsets. But offsets are “a great transitionary tool to get us there,” he said. He compared the concept to airline passengers paying to offset their flight emissions. “I don’t know many people who would decide, for the environment, to never fly again,” he said.
Labelle also used an example of offsetting at the individual level. The best approach for anyone seeking to reduce their own footprint is always to reduce emissions first and then offset the rest, she said. Eating meat every day, for example, is incompatible with net-zero goals. “Offsetting that consumption with carbon offsets kind of misses the point,” she said. “I think it’s the same with investment funds: it can be counterproductive if you give the false impression that the issue is solved with the carbon offsetting, because to get to net-zero, we need to invest in companies with credible net-zero emission plans that use credible carbon offsets as a last resort.”
Purpose Investments partnered with London, U.K.-based ETF specialist HANetf Ltd. to launch the HANetf S&P Global Clean Energy Select HANzero UCITS ETF, an ETF with net-zero holdings, in Europe in June. The ETF tracks the S&P Global Clean Energy Select Index to provide exposure to 30 companies across the biofuel, fuel-cell technology, geothermal energy, hydroelectricity, and solar- and wind-power sectors.
“Because of the nature of how we selected and constructed this fund, for a lot of [the holdings], the primary business line is already very much geared toward clean energy,” said Nicholas Mersch, portfolio manager with Purpose and portfolio co-manager of the HANetf ETF.
Basing the ETF on companies that are already net removers of emissions is important, Mersch said, because investors are allocating capital to green energy. Purpose’s strategy also makes the offsets less expensive: about five basis points of the ETF’s 0.55% total expense ratio. “It is so cost-effective because of our overall portfolio selection in the first place,” he said.
Lala said “decarbonizing” Evolve’s S&P 500 ETF (0.45% total fees) costs about 10 basis points and 16 bps for the more energy-heavy S&P/TSX 60 fund (0.51% total fees). He anticipates the cost will drop as companies reduce their carbon footprints.
Tapscott said the cost of offsetting emission from Ninepoint’s Bitcoin ETF is constantly changing. “For example, China just banned Bitcoin mining, and that means that a lot of non-renewable mining has been shut down,” he said, which would lower the ETF’s emissions. Bitcoin’s dramatic price swings don’t make it easy either.
Offsets are “a material cost to us,” Tapscott said, but one supported by the possibility of attracting more investors to the ETF. A portion of its 0.70% management fee goes toward the decarbonization’s cost.
Ninepoint uses data from the Munich-based Crypto Carbon Rating Institute to calculate the share of energy used in Bitcoin mining from fossil fuels and then the Ninepoint ETF’s share of all Bitcoin to come up with an annualized carbon footprint. Toronto-based CarbonX purchases the credits and retires them on a rolling basis to match the ETF’s carbon footprint, Tapscott said.
S&P Global Inc.’s Trucost division calculates the carbon exposure of the Evolve and Purpose funds. Evolve buys the offsets itself, while Purpose partners with Zurich-based carbon-offset specialist South Pole to purchase the credits.
The HANetf fund was launched on the London Stock Exchange and the Deutsche Börse because European investors are ahead of the curve on green energy, Mersch said. In Canada, Purpose has a climate-based fund to which, Mersch said, the company is considering adding an offset component.