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  1. Carbon footprint and risk exposure

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JPMorgan Climate Change Carbon Footprint

Assessing climate change risk: Carbon footprint

The most common way to measure the climate risk exposure of a company is to understand the level of carbon output. In addition to portfolio-level carbon analyses, we disaggregate portfolios at the sector and stock-level to understand the specific contributions to carbon emissions.

In the MSCI World Index, the utility sector accounts for 47% of carbon intensity and 38% of total carbon emissions. Almost two-thirds of the carbon emissions and intensity come from the utilities, oil & gas, chemicals, construction and mining sectors. 

An explicit goal of minimising carbon intensity in a portfolio will have significant implications for sector positioning, portfolio construction and potential alpha.

 

Stranded assets

Fossil fuel reserves (reserves of thermal coal, oil and gas) can also represent carbon risk as “future” carbon emissions. With the rising pressure of decarbonisation and energy transition, companies that own untapped fossil fuel reserves may be exposed to stranded asset risk. Hence, examining the extent of fossil fuel reserves and mitigating the bet size of a company that is overly reliant on fossil fuels versus its peers or benchmark can be one way to manage the environmental footprint of a portfolio.

Looking forwards

While a company’s carbon footprint is an important element in assessing climate risk, it needs to be reviewed in combination with the strategic initiatives the company is undertaking to manage any negative environmental impacts. 

Case Study: Xcel

The company with the highest carbon intensity in a sample global portfolio is Xcel Energy, a regulated utility company with operations in Minnesota, Colorado, Texas and New Mexico.


While Xcel Energy ranks poorly today in carbon emissions, the company is in the process of dramatically reducing the amount of power that it generates using coal. Over the next three years, Xcel Energy is building over 3,500 megawatts (mw) of new wind generation, which has already been approved by state regulatory agencies.
The company is targeting an 80% reduction in carbon emissions by 2030 – greater than the reductions requested in the Paris Climate Accord and President Obama’s unsuccessful Clean Power Plan. Xcel Energy is also adding solar generation and battery storage to its system, and improving energy efficiency to offset future emissions.

 


 

Xcel is in the process of dramatically reducing the amount of power that it generates using coal.

 


 

Xcel Energy is choosing an environmentally responsible path, while targeting EPS growth of 5-6% per year and dividend growth of 5-7% per year. The company has a strong credit rating, good growth prospects, and, with the cost of renewable energy generation declining rapidly, can maintain customer bill inflation at reasonable levels while continuing the transition of its power generation portfolio. Coal generation accounted for 10% of Xcel’s regulated rate base in 2018 and is expected to decline to 5% by 2024.

The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.

Further Reading

Energy transition

The carbon footprint is an important starting point, but is static and backward-looking. We combine it with a forward-looking view.

Read the case study

Water stress

Companies that generate more sales with less carbon, water and waste are likely to be more resilient to climate risk.

Read the case study

Clean technology

Some companies are rising to the challenge of climate change with new technologies that can represent carbon offsets.

Read the case study

Sustainable investing

We offer a range of investment solutions to help you align your portfolio with your values.

Invest for a changing world

This is a marketing communication and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy.
 

This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000.