We're pleased to announce an extension to Carbon Diagnostics that incorporates carbon credits into your portfolio analysis.

Recognising the complexity and dual utility of carbon credits, this extension enhances our existing offerings by providing a more detailed perspective on how carbon credits can impact financed emissions, temperature alignment, emission reduction requirements, and potential carbon liability.

This analysis begins by examining your portfolio’s baseline carbon exposure and alignment without carbon credits. We then apply an overlay considering any held carbon credits, offering insights into their potential use within the fund for either footprint reduction or hedging purposes.

What does this mean for you?

This extension enables a more nuanced analysis and strategic utilisation of carbon credits, enhancing portfolio analysis, decision-making, and climate strategy flexibility. It provides the tools to:

• Deepen your understanding of carbon credits' strategic influence on your portfolio’s climate metrics.

• Make informed decisions on using carbon credits for hedging financial liabilities or directly reducing emissions.

• Utilise the dual utility of carbon credits to adapt your portfolio’s climate strategy, maximising environmental and financial performance.

Some key insights from this deep dive:

• Carbon credits can either reduce potential carbon liability by acting as an asset and hedging future carbon liabilities or improve the temperature alignment of the portfolio through retirement, which effectively reduces the emissions footprint for a given year.

• It’s crucial to note that a single carbon credit cannot simultaneously reduce potential carbon liability and improve temperature alignment due to the differing mechanisms of action (holding vs. retiring).

• Holding carbon credits with the intention to sell in the future can serve as a hedge against carbon price fluctuations and associated risks with high-emitting investments.

• Retiring a carbon credit claims a reduction in the emissions footprint equal to one tonne for that year, improving the portfolio's temperature alignment but removing the credit's hedging potential.