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Carbon reduction methodology

For the Sustainable Balance Fund and Responsible Choice Model Portfolios

Carbon reduction calculation

The methodology 7IM uses is recommended by the TCFD (Task Force on Climate-related Financial Disclosures) where the portfolio aggregated figure is calculated based on an equity ownership approach. For example, if an investor owns 2% of the company, then the investor also owns 2% of the company’s carbon emissions.

Carbon Formula

Adjusted coverage aggregation

Due to data issues in fixed income and problems with apportioning ownership to fixed income holdings, this method focuses on equity ownership. To allow a fair comparison against the global equity index, we use MSCI’s coverage adjusted approach to scale up equities’ carbon footprint in each portfolio.

Calculation

The following steps summarise the calculation of the aggregate “Carbon Emissions – Scope 1 and 2 in metric tons” for a portfolio.

Step 1

We retrieve the following data points from our risk management system bi-annually:

  • Weight (%)
  • Market Value
  • Market Capitalisation
  • Carbon Emissions – Scope 1 and 2 in metric tons

Step 2

Filter assets and adjust the weight based on coverage using the following steps

Step 3

Multiply coverage adjusted weights by total portfolio market value and obtain coverage adjusted market value for each asset in the portfolio

Step 4

Divide coverage adjusted market value of each asset by the market capitalisation of each asset and obtain investor allocation on each asset

Step 5

Multiply investor allocation of each asset in the portfolio by the carbon emissions of each asset and obtain ownership of carbon emissions in each asset. Finally, sum ownership weighted carbon emissions in each asset to calculate the total carbon emissions generated by investing XYZ (total portfolio market value) in the portfolio

Step 6

Once we have the portfolio level approximation for carbon emissions scope 1 and 2 metric tons, we will source carbon emission figures for the everyday activities shown in the calculator. For example, airlines usually give estimates of carbon emissions for travel destinations, and you may have even noticed carbon figures the last time you booked a flight.

Step 7

We then divide the portfolio figure by the activities figures to get the amounts shown in the calculator.

Carbon Diagram

Example portfolio data

Holding typePortfolio weight %Portfolio market value £Issuer market cap £Carbon emissions in metric tonsCoverage adjusted weight %Coverage adjusted market value £ (Step 3)Investor allocation % (Step 4)Investor allocation of carbon emissions in metric tons (Step 5)
Equity A1010,000,000500,000,000100,0002020,000,0004.04,000
Equity B1010,000,0001,250,000,000500,0002020,000,0001.68,000
Equity C1010,000,000750,000,00025,0002020,000,0002,7667
Equity D1010,000,000------
Equity E1010,000,000500,0005,000,0002020,000,0004.0200,000
Equity F1010,000,0002,500,000,0002,000,0002020,000,0000.816,000
Fixed Interest G1010,000,000------
Fixed Interest H1010,000,000------
Fixed Interest I1010,000,000------
Fixed Interest J1010,000,000------
Portfolio totals - Where applicable100100,000,000-----228,667

Conclusion

By following the methodology explained above we obtain the following figures for the Sustainable Balance Fund and the Responsible Choice Model Portfolios as at 31 May 2024:

7IM PortfolioEmissions in metric tons adjusted per £1,000,000 invested
Sustainable Balance Fund25.95
Responsible Choice Cautious Model26.95
Responsible Choice Moderately Cautious Model31.03
Responsible Choice Balanced Model27.76
Responsible Choice Moderately Adventurous Model31.07
Responsible Choice Cautious Model Adventurous33.7
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