Once a niche activity, environmental investing is now moving firmly into the mainstream. The problem investors face, however, is that there is no universally accepted method for measuring a company’s environmental footprint. Much of the environmental auditing that currently takes place is either too subjective or too narrow in scope: Knowing how much carbon a business emits is useful but does not give the complete picture.
This is why the investment managers of OFI Pictet Global Environmental Solutions Fund have developed a distinctive process that deploys a scientific, rule-based framework to measure the environmental footprint of each of the 100-plus industries that make up the global economy.
Combining two globally recognized analytical tools – the Planetary Boundaries framework (PB) and Life Cycle Assessment (LCA) – the model is the lens we use to identify the world's most sustainable industries.
The LCA is an established tool that is used to calculate the waste emissions and resource usage of each industry that makes up the global economy. It analyzes every activity in the production of a good or service: the extraction of raw materials, manufacturing processes, distribution and transport, product use, and disposal and recycling.
The PB model is an analytical framework that defines the ecological “safe operating space” within which human activities should take place. It sets ecological thresholds for nine of the most damaging man-made environmental phenomena. The model quantifies a set of boundaries which, if breached, would endanger the planet’s ecosystem. For example, if the world’s CO2 emissions are to remain within acceptable levels, the proportion of the gas in the atmosphere must stay below 350 parts per million. Exhibit 1.
Using the data from the PB model, it’s possible to undertake an environmental audit of every industry in the economy, assessing every aspect of its chain of production, as defined by the LCA. The objective is to determine whether an industry’s resource use/waste generation is above or below the PB’s sustainability thresholds. Exhibit 2.
The PB-LCA represents the initial phase of the investment process. Once this audit is complete, our investment managers then undertake company-by-company research to identify firms with products and services that can help reverse environmental degradation.
Case Study: Evaluating the Fashion Industry’s Environmental Footprint1
The PB states that, for the world’s supply of fresh water to remain sustainable, humanity’s total consumption of water must stay within 5,000 to 6,000 cubic kilometers per year. Incorporating that figure into the LCA, this means that the threshold for water use for any industry – across its entire production chain – comes to 81,000 cubic meters per $1 million of annual revenue.
Using the LCA-PB, we find that the fashion industry uses almost 361,000 cubic meters of water per $1 million of annual revenue, more than four times the amount the PB considers sustainable.
The picture is even more worrying when it comes to carbon emissions. Under the LCA-PB model, for an industry to be considered sustainable, it must not generate more than 188.5 tons of CO2 equivalent emissions per $1 million of annual revenue. The fashion industry’s emission is nine times bigger than that. Exhibit 3.
Case Study: The Environmental Impact of Trucking
Using the LCA-PB model, we find that the trucking industry generates nearly 2,000 tons of CO2-equivalent emissions per $1 million of annual revenue, 10 times bigger than the LCA-PB threshold.
However, when it comes to emissions of ozone-depleting substances, the trucking industry is found to operate within parameters which are considered sustainable. Our analysis shows that the trucking industry generates 1.75 kilograms of chlorofluorocarbon (CFC)-11 equivalent emissions per $1 million of annual revenue. This is within the LCA-PB threshold of 2.48 kilograms. Exhibit 4.
OFI Pictet Global Environmental Opportunities Fund
- The strategy invests in the shares of companies that are making an active contribution to safeguarding the world’s natural resources.
- Investments are chosen from a broader universe consisting of the world’s 3,500 most environmentally responsible, publicly held firms – companies that meet the criteria of our proprietary ESG framework.
- The strategy is a concentrated portfolio of 50 to 60 stocks, with investments in firms operating in fields such as pollution control, water supply, renewable energy, waste management and sustainable agriculture.
- With a risk-return profile similar to that of a growth-oriented investment strategy, OFI Pictet Global Environmental Solutions Fund can be used to complement an equity allocation within a global portfolio.
- ^Source: Pictet Asset Management, as of 12/18/2018. Fashion category averages four BICS industries (Apparel; Footwear and Accessories Design; Leather, Hide Tan and Finishing; Textile; Textile Products).
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. The stocks of companies with favorable environmental practices may underperform the stock market as a whole. Small- and mid-sized company stock is typically more volatile than that of larger company stock. It may take a substantial period of time to realize a gain on an investment in a small- or mid-sized company, if any gain is realized at all.
The Fund’s portfolio managers are employed by its Sub-Sub-Adviser, Pictet Asset Management.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.