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Robeco introduces carbon offset share classes

© Shutterstock / maradon 333Globe over bills representing debt for climate swaps.

Robeco has launched a set of carbon offset share classes to help clients in addressing how to manage greenhouse emissions associated with underlying portfolio holdings.

  • The new share classes are intended to empower investors to contribute to climate solutions beyond reducing financed emissions.
  • The offer provides for three different climate-orientated investment strategies.
  • The launch is also expected to promote effective carbon markets, while also supporting local communities in emerging markets.

Robeco has begun the offering of carbon offsetting share classes for three climate-focused investment strategies:

  • RobecoSAM QI Global SDG & Climate Conservative Equities
  • RobecoSAM Climate Global Credits
  • RobecoSAM Net Zero 2050 Climate Equities

By providing these share classes, Robeco argues it is empowering clients to continue their decarbonisation efforts in line with the Paris Agreement, and even take an extra step. The process of the offer means that, if investors buy these particular share classes, part of the investment will be used to buy carbon offset credits.

The asset manager said that the offsets purchased will equate to the Scope 1 and 2 emissions of the portfolio companies attributable to the share class. While Robeco said that Scope 1 and Scope 2 emissions cover a significant portion of an organisation’s carbon footprint, up to 90% of many businesses’ footprint can be in Scope 3, or the supply chain.

The Dutch asset manager is not the first to offer such a share class. Earlier in 2023, UK-based Schroders launched its own offset share class, initially applied to a fund focused on climate leaders.

Where will the credits come from?

Carbon markets are trading systems in which carbon credits are bought and sold. These credits are generated by projects such as reforestation, renewable energy, or carbon capture and storage. They need to follow certain quality standards to be certified and offered for sale on voluntary carbon markets. Robeco said that, by buying these credits, organisations will help to fund concrete projects that mitigate climate change on the ground.

The credits are expected to be more than just emission reduction credits; they should have a sustainability element that provides a wider impact. For example, they could help finance climate projects that benefit local communities and contribute to inclusive economic growth.

In one example, a project in Bangladesh is focused on repairing leaking gas infrastructure with the purchase and import of specialised leak detectors. Local people are being trained in how to check for and fix gas leaks to cut emissions.

To ensure the quality of the credits offered to clients, Robeco has set itself standards through which it will screen partners and their projects. The firm said: “The credits are sourced only from reputable partners who perform rigorous due diligence on any project they offer. Secondly, Robeco applies a quality framework to the projects and performs due diligence themselves. Thirdly, Robeco makes use of a specialised rating agency that performs independent third-party quality assessments of carbon projects.”

Challenges in the carbon markets

As is being widely discussed, carbon markets are facing significant challenges over debates about the integrity and robustness of emission reductions driven by credits. This makes it challenging for investors to operate confidently within this space. Robeco said that its approach overcomes this issue through a mitigation hierarchy of emissions reduction and additionality.

The primary focus of the credits purchases is to reduce emissions. The carbon offset share class is offered only for climate funds that have a carbon footprint reduction objective linked to a Paris-Aligned Benchmark or Climate Transition Benchmark, which both incorporate a 7% year-on-year decarbonisation trajectory. In 2019, UNEP warned that the global annual decarbonisation of the economy needs to be 7.6% to reach net zero by 2050.

The next critical element is additionality. The carbon credits purchased are not being used to make the funds CO2 neutral, but to support climate action elsewhere in the economy. The financed emissions are thus voluntarily compensated.

In the future, when decarbonisation has reached its technical or economical limit (known as residual emissions), the carbon credits will be used to neutralise the remaining portfolio footprint.

Lucian Peppelenbos, climate strategist at Robeco, said: “The launch of the carbon offset share classes, underpins Robeco’s commitment to sustainability and responsible investing. Research shows carbon markets can halve the costs of implementing the Paris Agreement.”

“At this moment, globally EUR1 trillion is invested in climate solutions. The biggest part is invested in industrialised countries. However, we need EUR 4 trillion for the net-zero transition, the biggest part of which has to be invested in developing countries so that we decarbonise the wider global economy. The set-up of our carbon share classes offers the possibility to our clients to contribute to this important goal.”

Financed emissions

It is increasingly understood that it will not be possible to address the interconnected sustainability crises the world faces without action in the financial sector. Financed emissions are those emissions generated as a result of financial services, investments and lending. While they are officially covered by Scope 3 emissions reporting on the grounds that such figures help us understand what an institution is funding, there is a lack of clarity around methodological approaches and few banks have addressed the impact of their funding of emissions generation through all types of finance.

For example, research published in February 2022 found that European banks provided over $400 billion to 50 leading companies expanding oil and gas production between 2016 and 2021, with HSBC (LSE:HSBA), Barclays (LSE:BARC) and BNP Paribas (PAR:BNP) the worst offenders. The report found that 92% of this financing was in the form of general-purpose corporate finance, with only 8% project finance or dedicated financing.

According to an April 2023 report from the Rainforest Action Network, Banking on Climate Chaos, the 60 biggest banks in the world contributed $5.5 trillion to the financing of fossil fuel projects in the last seven years.

Moreover, Corporate Knights and The Banker recently collaborated to produce the 2023 Sustainable Banking league table, the second annual ranking monitoring how global banks are helping finance the green transition. While the financing of the transition is up around 55% year on year to a total of $2.6 trillion overall, fossil fuel financing still dominates.

Matthew Malinsky, research manager at Corporate Knights said: “Banks need to slash their fossil fuel financing and immediately abolish any funding to expansion projects, while continuing to increase their exposure to projects funding the transition to the low-carbon economy.”

SGV Take

Robeco’s initiative is a great step forward to assist investors in addressing financed emissions. It’s also sensible to implement a process which has a clear hierarchy in terms of credits to be purchased. There is no question that achieving the Paris goals requires a massive step change in the level of emissions reduction. At the same time, investors are increasingly looking to their financed emissions as a reputational and investment risk.

The challenge here is that the focus is on Scope 1 and 2 emissions, or those under the company’s direct control. These are emissions which the company should therefore be addressing itself – under SBTi rules, companies should look to emissions reductions internally before looking to the supply chain, and then long term only 5-10% of reductions should be achieved through offsetting.

Investors that take this approach are potentially side-stepping the issue of how to drive action at the corporate level. It’s a question that remains open to debate, but one that every investor should be asking – are your portfolio companies taking action on emissions, and are you supporting that strategy or not?

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