Are SRI Funds Financing Carbon Emissions? An Input-Output Life Cycle Assessment of Investment Funds

Abstract

Indirect greenhouse gas (GHG) emissions (scope 3) generally represent more than half of the total life cycle impact attributable to a company or an investment. However, widely used sustainability assessment tools for investment funds fail to take these into account. Building on best practices from the industrial ecology field, we develop an Input-Output Life Cycle Assessment (IOLCA) methodology to estimate life cycle GHG emissions of companies and investment funds. We apply our method to a sample of 1,340 sustainable (SRI) and conventional equity funds domiciled in Europe and their 11,275 unique holdings. We extend our application to a case study of Article 8 and Article 9 SRI funds, labelled under the recent European Sustainable Finance Disclosure Regulation (SFDR, 2019). Our model estimates life cycle emissions for 95% of the companies held – compared to 17% coverage in the Carbon Disclosure Project (CDP). When including scope 3, the exposure to GHG emissions of both SRI and conventional funds is two to three times larger than when considering only direct impacts from holdings’ operations. Finally, 24% of the sampled Europe-domiciled SRI funds are more exposed to life cycle carbon emissions than the ETF tracking the conventional market index MSCI Europe.

Keywords: sustainable finance, sustainable investing, carbon footprint, GHG emissions, input-output analysis, SRI funds

JEL Classification: G11, G23, Q50, Q54, Q56