Sustainability Attribution: The case of carbon intensity

Abstract

This paper proposes a method to decompose the carbon intensity of a portfolio with respect to a benchmark into an allocation and a selection component. The carbon intensity decomposition allows a better understanding of the sources of the difference between the carbon footprint of a portfolio and that of its benchmark. As such, it prevents greenwashing by analyzing whether the carbon exposure of a portfolio results from active stock selection choices on the part of the manager or from passive sector exclusion decisions. Our approach is based on methods developed for traditional performance attribution. We discuss an equity example using the MSCI ACWI Sustainable Impact Index and a fixed income example around the ICE BofA Global Corporate Green Bond Index. In the latter example, we show that a higher portfolio carbon intensity does not necessarily contradict the portfolio’s stated ESG or Impact objectives. Our methodology can easily be extended to any other sustainability or impact metric that is constructed as a weighted average of asset scores, providing greater precision in analyzing the sources and implications of incorporating ESG into portfolio construction.

Keywords: Carbon intensity, ESG investing, ESG metrics, Impact investing

JEL Classification: Q5, G1