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Are the new carbon offset ETFs too simplistic of a solution?

Investment Executive | Mark Burgess | Oct 12, 2021

what is a carbon offset - Are the new carbon offset ETFs too simplistic of a solution?Some advocates of responsible investing say the focus should be on reducing emissions in the first place

As more clients take interest in environmentally friendly investments, providers of new products are buying credits to offset the greenhouse-gas emissions of companies held in their portfolios.

While carbon offsets play a role in reaching net-zero emissions targets, some advocates of responsible investing say focusing on offsets rather than reductions may be a “simplistic” solution.

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Toronto-based Evolve Funds Group Inc., Ninepoint Partners LP and Purpose Investments Inc. have launched ETFs in recent months that offset their holdings’ carbon emissions. Evolve’s funds use broad indexes as a starting point, Purpose’s ETF is focused on clean energy companies and Ninepoint seeks to offset emissions related to its investments in Bitcoin.

The ETFs use third-party data providers to determine the carbon footprints of their portfolios. Then, the funds purchase credits for certified carbon offset projects to counter emissions and subsequently retire those credits (i.e., remove them permanently from the market). The cost of purchasing the offsets is included in fund fees.

Evolve president and CEO Raj Lala said carbon offsets are an alternative to more complex environmental, social and governance (ESG) screening methods that sometimes leave investors “scratching their heads.”

There are no standards for what constitutes an ESG or sustainable fund, which has led to accusations of “greenwashing” or attaching an environmentally friendly label to a fund that doesn’t live up to the billing.

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Investors can be confused or disappointed when they purchase an ESG ETF that turns out to have a major oil company among its top holdings, for example.

As of September 2021, the Cambridge Bitcoin Electricity Consumption Index showed that Bitcoin activities consume about 97 terawatt-hours of electricity annually — more than the Philippines does. Tapscott said that roughly half of the energy used in Bitcoin mining is from renewables, “but half of a big number is still a big number.”

Marie-Justine Labelle, head of responsible investment with Desjardins Investments Inc., called offsets

“a simplistic solution to what is a very complex issue. It removes the onus on the investing companies to take ownership of their carbon-reduction journey.”

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