The carbon footprint shows how much carbon dioxide and other greenhouse gases the financial assets in a portfolio generate in relation to the goods and services produced. The measure thus shows emissions per unit of output.
The carbon footprint also takes into account greenhouse gases other than carbon dioxide. Consequently, a standard unit known as carbon dioxide equivalents is used. Carbon dioxide equivalents are a measure whereby the warming potential of different greenhouse gases is translated into a standard unit. This is because emissions of a certain amount of greenhouse gas have different effects on the climate. For example, per tonne of emissions, the greenhouse gas methane contributes 28 times more to global warming than carbon dioxide, which means that one tonne of methane emissions equals about 28 tonnes of carbon dioxide equivalents. See IPCC (2014). This measure takes account of the varying extent to which different greenhouse gases affect the climate.
The carbon footprint is a backward-looking measure, as it shows a historical snapshot of emissions from the portfolio’s holdings over the past twelve months. A portfolio’s carbon footprint is a weighted average of the carbon intensity of the individual portfolio holdings. A portfolio with a low carbon footprint means that the financial assets in the portfolio have been invested in countries or regions with lower greenhouse gas emissions in the production of goods and services within the geographical area’s borders. As greenhouse gas intensity is measured in relation to the value of the goods and services produced, the carbon footprint of the portfolio can be compared to other portfolios including those that are of different size.
In addition to displaying a historical snapshot of a portfolio’s carbon footprint, the measure can be used to illustrate how the carbon footprint develops over time. The footprint will vary over time as emissions and production change, as well as when the composition of the portfolio changes. The measure is also affected by changes in inflation and exchange rates.