Not all carbon is created equal

That the emission of greenhouse gases by humans is contributing to global warming with unpredictable and dangerous impacts on the global environment is now beyond dispute. Hence, as a society, we clearly need a credible plan to mitigate these emissions.

With that qualification out of the way, we can proceed to our argument by way of example. 

Let’s take a family of four going on holiday from London to Morocco. The carbon emissions of the return flights are 1,480kg according to the International Civil Aviation Organization. Or take New York to Cancun - that’s 1,600kg. Let’s assume that our family of four are creatures of habit and go on the same trip every year for five years. That’s 7,400-8,000kg of carbon.1

By contrast, take a family in Peru that over that same five years patiently save up the profits from the store they run in order to build themselves a 500-square-foot home with cement, replacing their more makeshift dwelling made from scrap materials. Our research suggests they might require 350 bags of cement, which has a carbon footprint of nearly 8,000kg.2

Carbon counting

While we don’t mean to argue that international travel is frivolous or entirely wasteful, it is hard to argue that the restorative effects of a fortnight’s getaway has the same societal utility as a literal roof over one’s head. A decade hence, the fond memories of a family holiday have long since faded, while the home remains standing and providing continued benefits to the inhabitants.

In financial terms, one is an annual operating expense and the other is a long-term capital investment. Thus, the assertion in our title that not all carbon is created equal. This is important because the investment industry is increasingly obsessed with counting carbon, based on the premise that the lower the carbon output of a portfolio of companies, the better.

Another premise that ought to be made explicit, is that people (particularly in democracies) typically expect their quality of life to go up over time, or at least not decline. So, if you accept that premise, it follows that we as a society are not going to attempt, nor achieve, zero carbon emissions. Our ancestors didn’t burn much carbon, but nor did they have central heating or a super-computer in their pockets.

Thus, if we are to transition to a lower carbon intensity economy in an equitable way without materially reducing the quality of life of millions of people, particularly in developing countries, we have to think in a more nuanced way about our global carbon footprint. 

Some carbon emissions can be fairly easily replaced by better alternatives - coal-fired power plants can be run on natural gas - or eliminated entirely by reducing single-use plastic bags, without much societal hardship. However, other technologies like cement (and in many cases oil) are much more difficult to substitute. While there are many promising technologies, such as innovative uses of wood, these are not likely to be available at commercial scale within the next ten years. 

Our approach

At Stewart Investors, we strongly believe there is no perfect company, with zero negative impacts. Every business is a series of trade-offs between competing stakeholders, be they shareholders, employees, the environment or broader society.

Looking at investments purely through the lens of carbon intensity ignores those trade-offs. Businesses provide products that improve consumers’ quality of life, create employment opportunities, and pay taxes that fund governments.

Perhaps they produce products that are harmful such as junk food, pay low wages or avoid taxes. These are all serious concerns when making an investment, not least because of the risk of regulatory action to end these negative externalities.

"There is no perfect company. Every business is a series of trade-offs between competing stakeholders, be they shareholders, employees, the environment or broader society."

Similarly, a business model that is premised on producing a high level of greenhouse gases is clearly risky, given the likelihood of a carbon tax (or a higher tax where one already exists) or other regulation in the future, and evidently something to consider carefully when making an investment. However, we don’t believe a business’s carbon emissions ought to be regarded in isolation. 

Instead, a company needs to be assessed holistically, weighing all of its positive and negative impacts. This requires meticulous analysis, as well as meetings with management teams over many years to understand motivations and value systems in order that we can have comfort that those running the businesses we invest in are thinking sufficiently broadly about the risks to their operations.

We gladly invest in several emerging market cement manufacturers which, despite being criticized for the carbon intensity of the cement production process, are providing a necessary, useful good that improves the quality of life of millions around the world - especially in poorer nations. They are investing in their plants to run off lower carbon fuels and sponsoring new innovations to further reduce the carbon intensity of their products. We will continue to support them in these endeavours and encourage them to be bolder in pursuing such investments to protect their long-term right to operate.

Dominic St George
October 2021

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  1. Carbon emissions calculated using the Civil Aviation Organization’s (ICAO) carbon emissions calculator - September 2021.

  2. Based on an estimate of 0.9kg of CO2 emissions per 1kg of cement (Cement bag being 25kg). CO2 emission estimate as quoted in ‘Perspectives on environmental CO2 emission and energy factor in cement industry’ G U Fayomi et al 2019 IOP Conf. Ser.:Earth Environ. Sci. 331 012035