Infographics

How Carbon Offsetting Works, and What Investors Should Know

Published

2 years ago

October 19, 2020

Marcus Lu

How Carbon Offsetting Works, and What Investors Should Know

This infographic is available as a poster.

Carbon Offsetting: What Investors Should Know

In 2016, an international treaty known as the Paris Agreement was negotiated by member nations of the UN Framework Convention on Climate Change.

The long-term goal of this agreement is to limit the increase in global temperature to below 3.6°F (2°C) over the next century. Achieving this target will require the world to develop cleaner solutions across all areas of the economy, from energy to transportation.

In this infographic from New York Life Investments, we introduce carbon offsetting, an activity used by both businesses and investment funds that has the potential to accelerate the development of a more climate-friendly economy.

What are GHG Emissions, and Where do They Come From?

Greenhouse gases (GHGs) are a family of gases known to trap heat in the Earth’s atmosphere. The most prevalent among them is carbon dioxide (CO₂), which accounts for 80% of America’s GHG emissions. Common sources of CO₂ include fossil fuel consumption and deforestation.

Businesses are often significant emitters of CO₂, but due to the complexity of their production chains, emissions can be difficult to track. To combat this, a company’s carbon footprint is measured across three scopes:

Scope 1: These are direct emissions from a company’s operations. An example would be the CO₂ emitted by company-owned factories.
Scope 2: These are indirect emissions from a company’s operations, such as the pollution generated from purchased electricity.
Scope 3: These are indirect emissions from the company’s supply chains. Common sources include the extraction of raw materials and business travel.

Although we understand that GHGs are harmful to the planet, our ability to eliminate them is limited by technology and costs. Fortunately, this is where offsetting can help.

How Does Carbon Offsetting Work?

Carbon offsetting is a method of neutralizing one’s emissions by investing in GHG-reducing projects. The benefits of these projects are measured by the amount of CO₂ equivalent (CO₂e) that they avoid or absorb. Then, the company or fund that is engaging in the carbon offsetting project will then receive one carbon credit for every tonne of CO₂e negated.

Below are the three common types of GHG reduction programs.

1. Energy efficiency projects

These projects reduce energy consumption. One example is the distribution of energy-efficient cookstoves in Rwanda, a country where many people rely on firewood and charcoal. By distributing 10,800 cookstoves throughout the country, nearly 60,000 tonnes of CO₂e can be avoided each year.

2. Forestry projects

These projects nurture and protect our CO₂-absorbing forests. One notable example is the Garcia River forest protection program, which ensures the longevity of California’s redwood forests. The program oversees over 9,600 hectares which has been estimated to store almost 80,000 tonnes of CO₂e annually.

3. Renewable energy projects

These projects reduce our dependency on fossil fuels. They are especially effective in economies such as Taiwan, where 75% of electricity capacity relies on fossil fuels. Thanks to its strong coastal winds, Taiwan is able to remove 328,000 tonnes of CO₂e per year with just 62 wind turbines.

How is Offsetting Regulated?

Carbon offsetting in America is primarily a voluntary activity, but some state governments have made it mandatory for significant polluters. Here’s how both markets are regulated.

The Voluntary Market

The voluntary market is regulated by a variety of third-party organizations such as Verra, Gold Standard, and American Carbon.

They conduct audits on GHG reduction projects to ensure each one meets four broad criteria:

Measurability: The GHG savings of the project must be measurable
Verifiability: The results of the project must be verified on an annual basis
Sustainability: Each project should have a minimum lifespan of seven years
Additionality: GHG reductions of project must be considered in reference to a baseline scenario

Carbon credits are only issued after a project has passed this verification process.

The Mandatory Market

Some U.S. states have introduced carbon offsetting schemes to meet their climate goals. One of the largest is California’s Cap and Trade program which was introduced in 2013.

The program is targeted at businesses that emit over 25,000 tonnes of CO₂e annually, and works by setting a “cap” on total annual emissions. This cap is reduced each year, and overpolluting businesses must acquire carbon credits to offset their excess pollution. These can be purchased from state-administered auctions or from other firms.

Revenues generated from California’s carbon credit auctions are used to fund various GHG reduction projects, including:

690,000 acres of land preserved or restored
287,000 rebates issued for zero-emission and plug-in hybrid cars
108,000 urban tree plantings
150,000 energy efficiency projects installed in homes

By 2030, California’s emissions cap is intended to reach 200.5 million tonnes of CO₂e, marking a near 50% reduction from its 2015 level.

What Role can Investors Play?

A majority of U.S. investors consider themselves to be values-based, meaning they care about the societal and environmental impacts of their investments. This mentality is increasing the demand for ESG investing and placing pressure on corporations to become more sustainable.

For example, the percentage of S&P 500 firms that publish sustainability reports has risen from just 20% in 2011 to 90% in 2019. More importantly, a growing number of U.S. firms are cooperating with the CDP (formerly the Carbon Disclosure Project) to report their emissions and set formal reduction targets.

Year	Companies with active emissions reduction targets	All other companies reporting to the CDP	Total
2013	322	166	488
2014	335	164	499
2015	365	143	508
2016	378	124	502
2017	385	123	508
2018	389	117	506
2019	419	138	557

Source: CDP 2020

Some of the world’s largest oil producers are also taking action—a testament to the significance of these shareholder concerns. Royal Dutch Shell announced earlier in 2020 that it intends to fully offset its Scope 1 and 2 emissions.

Does Offsetting Really Help?

Carbon offsetting programs such as the one implemented by California have the potential to generate revenues and encourage innovation. Critics, however, have suggested it has a number of design issues.

One such issue is the fact that California’s carbon credits do not expire. This could allow companies to stockpile credits and ignore future cuts to the emissions cap. Another concern is that the companies covered by California’s cap and trade will simply pass their higher costs to the consumer, although this claim didn’t seem to hold up in a 2016 study conducted by UCLA.

Other inefficiencies within the program may exist, but its benefits are hard to ignore. By the end of 2019, the revenue generated from California’s carbon credit auctions totaled $12.5 billion. Of this amount, over $5 billion has been invested in GHG reduction projects to date.

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Infographics

How Experts Think About Bear Market Opportunities

We look at quotes from investing legends like Warren Buffett and Peter Bernstein to take cues on how investors should approach a down market.

Published

2 weeks ago

August 4, 2022

Dorothy Neufeld

How Experts Think About Bear Market Opportunities

Today, the majority of Americans are worried a bear market is looming.

The good news: there are silver linings. Bear markets can present bargains for investors, thanks to inefficient pricing and fear in the market. Going further, many investing greats have made key investments during market downturns including:

Warren Buffett: Automotive sector during the 2008 Global Financial Crisis
Shelby Davis: Financial sector during the 1997 Asian Financial Crisis
Peter Bernstein: Gold during the 2000 Dot-Com Crash

In this infographic from New York Life Investments, we show four quotes on bear market opportunities and the data behind their insight.

How Experts Think About Bear Market Opportunities

When faced with the challenges of a bear market, how do experts respond?

1. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

— Warren Buffett, CEO of Berkshire Hathaway

Just like a bargain on socks may be an opportunity for buyers, a bargain on stocks is an opportunity for potential upside. In fact, the S&P 500 Index has seen double-digit gains 85% of the time after extremely pessimistic sentiment since 1987.

Investor pessimism can be measured by a ‘bull-bear spread’. This is based on an AAII survey that measures investor expectations for the market in the next six months. It is calculated by taking the percentage of investors who are ‘bullish’ on the market minus those who are ‘bearish’.

For example, in the week of April 29, 2022:

Bullish: 16.4%
Bearish: 59.4%
Bull-Bear Spread: – 43

Here’s how the S&P 500 Index performed after periods of extreme investor pessimism:

Date	Bull-Bear Spread	S&P 500 Index 12-Month Return
10/19/1990	-54	26%
3/6/2009	-51	67%
10/5/1990	-44	22%
9/21/1990	-43	25%
11/16/1990	-43	21%
4/29/2022	-43	?
8/17/1990	-41	18%
1/11/2008	-39	-36%
3/14/2008	-39	-41%
8/31/1990	-38	23%
2/21/2003	-37	35%
10/16/1992	-36	14%
7/9/2010	-36	25%
9/14/1990	-35	21%
10/26/1990	-35	26%
2/20/2009	-35	44%
4/12/2013	-35	14%
12/21/1990	-34	17%
7/21/2006	-34	24%
1/25/2008	-34	-38%

Source: Bloomberg, 5/12/22

As the above chart shows, investor pessimism is at its highest in 20 years.

Instead of thinking of how bad the market is doing, investors may be better of thinking of the market as being significantly less expensive.

2. “History provides crucial insight regarding market crises: they are inevitable, painful, and ultimately surmountable.”

— Shelby Davis, founder of Shelby Cullom Davis & Company

Bear markets hurt. On the bright side, they only account for 29% of the market environment, with bull markets making up the lion’s share (71%). What’s more, stocks have spent the vast majority of time at or near their all-time highs.

Market Environment	Description	% of Time in Market Environment
All-Time High	Stock market hits all-time high	35%
Bull Market Dip	Stock market falls under 10% from all-time high	33%
Bull Market Correction	Stock market falls over 10% but less than 20% from all-time high	3%
Bear Market Drawdown	Stock market falls over 20% from peak to trough	10%
Bear Market Recovery	Time it takes to reach next all-time high	19%

Source: Morningstar Direct, PerformanceAnalytics, UBS 4/30/2022. Based on monthly returns from 1945.

Overall, stocks have spent around two-thirds of the time at or near all-time highs.

3. “The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes.”

— Peter Bernstein, economist and financial historian

To avoid falling for the behavioral pitfalls of a market cycle, investors can identify key macro indicators of each stage. Below, we show the economic indicators and how they associate with each type of market cycle.

Market Cycle	Monetary Policy Shock*	Consumer Sentiment	Employment	Sales	Purchasing Managers Index (PMI)
Bull	Positive	Positive	Positive	Highly Positive	Highly Positive
Correction	Positive	Negative	Positive	Negative	Negative
Bear	Positive	Highly Negative	Highly Negative	Highly Negative	Highly Negative
Rebound	Highly Negative	Positive	Negative	Negative	Negative

Source: Goulding, L. et al., May 2022. *Represents an unexpected move in monetary policy.

As the above table shows, bear markets are associated with low consumer sentiment, high unemployment, low corporate sales, and weak manufacturing performance—with a high number of macroeconomic shocks.

4. “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

— Winston Churchill, former Prime Minister of Britain

Just like bear markets can stoke investor uncertainty, rising interest rates can cause stock market disruption. However, since 1954 the S&P 500 Index has returned an average 9.4% annually during Fed rate hike cycles.

Fed Rate Hike Cycle	S&P 500 Index Annualized Total Return
Aug 1954 - Oct 1957	14%
Jun 1958 - Nov 1959	24%
Aug 1961 - Nov 1966	7%
Aug 1967 - Aug 1969	4%
Mar 1972 - Jul 1974	-9%
Feb 1977 - Jun 1981	11%
Mar 1983 - Aug 1984	13%
Jan 1987 - May 1989	16%
Feb 1994 - Feb 1995	4%
Jun 1999 - May 2000	10%
Jun 2004 - Jun 2006	8%
Dec 2015 - Dec 2018	8%

Source: Morningstar, Haver Analytics, March 2022

Not only that, the S&P 500 Index has had positive returns 11 out of 12 times during periods of rising interest rates. Despite the short-term impact to the market, stocks often weather the storm.

Finding Bright Spots

In summary, it is helpful to remember the following historical characteristics of a bear market:

Extreme pessimism
Short-lived
Higher macroeconomic shocks (employment, sales, PMI)

Investors can find opportunities by considering a contrarian point of view and learning from the time-tested experience of investing legends.

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Infographics

Retirement Savings: How to Calculate If You’re on Track

This graphic shows how to plan for sufficient retirement savings, and how the U.S. population measures up at each step.

Published

2 months ago

June 28, 2022

Jenna Ross

Retirement savings by age group, to help people gauge their own retirement planning. Retirement balances get bigger until age 65-74 and go down for those over age 75.

This infographic is available as a poster.

Retirement Savings: How to Calculate If You’re on Track

Setting a retirement savings goal can be overwhelming. In fact, one in three Americans have no idea what they need to save to retire at their target age.

Luckily, we can use a retirement calculator to help outline what you need to consider. This graphic from New York Life Investments walks you through setting your retirement savings goal, and shows how the U.S. population measures up at each step.

Step 1: Your Age

A calculator will typically start by asking for your current age and your target retirement age. This is to determine how long you have left to build up your investments. In the U.S., the average age of retirement has remained relatively stable and is currently 62.

Keep in mind that your retirement age can depend on many factors:

Your cost of living
Your job satisfaction
Your debts
Your spouse’s retirement plan
Your health

After you have your projected retirement age figured out, you’ll also need to estimate the length of your retirement.

The life expectancy for Americans at birth is 77 years. Once you’ve lived to age 65, that number is higher. This is because you’ve survived many untimely causes of death, including the higher mortality associated with childhood. The below table shows how the expected age of death changes as you age.

	At Birth	At Age 65
Male	74	82
Female	80	85
Both Sexes	77	84

To estimate your particular lifespan, you’ll also need to consider things like your genetics and your lifestyle. Having an idea of how long you might live may help you better manage longevity risk, or the risk you’ll outlive your savings.

Step 2: Your Savings

The next step in setting your retirement savings goal is to take stock of how much you’ve already saved. For context, here is how much Americans have saved for retirement by age group.

	Median Balance	Average Balance
< 35	$13,000	$30,170
35-44	$60,000	$131,950
45-54	$100,000	$254,720
55-64	$134,000	$408,420
65-74	$164,000	$426,070
> 75	$83,000	$357,920

You’ll also need to decide how much you’ll be putting toward your retirement each year. Experts typically recommend saving about 15% of your pre-tax income. This can include your employer’s contributions, if any. Of course, this amount will vary based on how early you start saving and when you plan to retire.

Your expected investment earnings will play a big role, too. Here is what average annual returns have been for different types of portfolios based on historical data from 1928-2021.

	Conservative (80% bonds, 20% stocks)	Balanced (40% bonds, 60% stocks)	Growth (20% bonds, 80% stocks)
Nominal Return	8%	10%	11%
Real Return	5%	7%	8%

Inflation has averaged about 3% each year. Remember to include inflation in your calculations so you can maintain purchasing power in retirement.

Step 3: Your Income

In the final step of setting your retirement savings goal, you’ll need to decide how much of your current household income you will use in retirement. Financial experts typically estimate you could need 70-80% of your pre-retirement income.

At this stage, it can be helpful to plan out a detailed budget. Here’s a spending overview for the average American over age 65.

Category	Annual Spending
Housing	$17,435
Healthcare	$6,668
Transportation	$6,221
Food	$5,698
Donations, Child and Spousal Support	$3,119
Personal Insurance and Pensions	$2,721
Entertainment	$2,293
Clothing	$821
Alcohol and Tobacco	$635
Other	$2,033

Other includes personal care products and services ($505), education ($450), reading ($157), and miscellaneous expenses ($921).

Now that you have an estimate of your expenses, you can factor in all sources of income you expect to receive in retirement. This helps narrow down what you need to have set aside in your retirement savings. For instance, most people collect Social Security in addition to their own pension. The below table shows what percentage of retirees have each income source.

Source	Retirees Age 65 and Older	All Retirees
Social Security	92%	78%
Defined Contribution or Defined Benefit Pension	66%	57%
Interest, Dividends, or Rental Income	49%	43%
Wages, Salaries, or Self-employment	25%	32%
Cash Transfers Other Than Social Security	7%	11%