Harbour Asset Management has expanded carbon-counting to cover its local fixed income products via a bespoke metric including a proxy estimate of NZ government emissions exposure.
In a paper published last week, Harbour senior credit analyst, Simon Pannett, notes that the majority of diversified investors tend to exclude fixed income assets from carbon measurements due to double-counting conflicts with the standard market capitalisation-based yardstick used for the emissions ‘footprint’ of equities.
“For this reason, most entities that own portfolios of both equity and debt, including, for example, the NZ Super Fund, measure their carbon footprint across their equity investments only,” Pannett says.
While substituting ‘enterprise value’ (a combined view of corporate debt and equity) for market cap might resolve the technical issue, Harbour favours the weighted average carbon intensity approach as a measure “that is comparable across portfolios and, unlike some metrics, does not suffer from portfolio size distortions”.
“All of Harbour’s funds now include Weighted Average Carbon Intensity performance in their monthly Fund Fact Sheets which are available on our website,” the paper says.
NZ corporate carbon data should improve under the in-train climate-reporting regulations but the information available on entities captured under the Bloomberg Composite Bond Index – the main local fixed income benchmark – remains sparse.
“Prominent among the non-reporting entities is the New Zealand Government (who passed the climate-related disclosures legislation, but exempted itself),” the Harbour report says.
NZ government debt, in fact, represents about two-thirds of the benchmark, which leaves a big hole in carbon measures linked to the Bloomberg index.
“We have been engaging with the Debt Management Office for an extended period on this issue and have confidence government-wide reporting is in the making,” Harbour says. “In the interim, we have created a proxy for the Government’s carbon footprint. To calculate this proxy, we have referred to the footprint of other nations and normalised for spend by activity, for example, normalising for the fact that countries that spend more on defence tend to have a higher footprint.”
According to the Harbour estimate, the NZ government is a relative carbon lightweight in a finding that pushes the manager’s current fixed income portfolio emissions gauge above benchmark.
Pannett says the Harbour fixed income funds remain sub-index on NZ government bonds following an increase in the sovereign debt benchmark weighting that “has risen above what we believe is optimal for investors following quantitative easing”.
“We believe capital can make a difference if it is funnelled to those who are efficient at what they do,” he says.