Carbon Counts USA, a new report from research firm (and KLD partner) Trucost, studies the "carbon intensity" of 91 major mutual funds. Trucost found wide variation in funds' carbon footprint, as the highest-carbon fund they studied was 38 times as carbon-intensive as the best performer.

Perhaps due to the Obama Administration's stated commitment to a national carbon emissions market, Carbon Counts USA (available here) has attracted attention from the business press. Dow Jones' Daisy Maxey writes that major fund managers are "responding cautiously" to the implication that they should consider companies' carbon footprints:

"In carefully worded statements, some companies shied away from ideas like explicit environmental screening but contended that, to the extent that carbon emissions are affecting a company's profits, it would be included in a fund manager's evaluation."

What about investors who embrace "explicit environmental screening"? Carbon Counts USA studied 16 funds that incorporate environmental, social, and governance (ESG) factors into their strategies:

"Of the 91 analyzed funds, 16 include sustainability or socially responsible investing (SRI)considerations. These 16 funds comprise holdings valued at over $24 billion and have the smallest aggregated carbon footprint [of any researched fund style]..."

While the overall carbon efficiency of SRI funds is welcome news, Trucost found some notable outliers:

"…Sustainability/SRI funds have the smallest carbon footprint. However, within this category, carbon efficiency varies widely – some of the largest SRI funds are more carbon intensive than the S&P 500."

Why do some funds that seek to hold strong environmental performers actually deliver worse-than-average carbon efficiency? To understand this, consider how Trucost constructed its study, and also note that there is more than one way for investors to support lower global carbon emissions. Some companies' products and services may reduce their customers' carbon output – but not their own. How Trucost Measures Carbon Intensity Carbon Counts USA presents a concise summary of Trucost's methodology:

"The equity fund carbon footprint is calculated by measuring each constituent company's GHG emissions. Quantities of each GHG are converted into their carbon dioxide-equivalent (CO2-e) emissions. CO2-e emissions associated with a company are allocated to the fund in proportion to ownership. The carbon footprint is expressed as metric tons of CO2-e emitted by the companies within each fund per million dollars of revenue."

By this measure, a fund's carbon intensity reflects the business models of its constituents. Trucost notes that the five most carbon-efficient funds all avoid energy-intensive businesses like mining, energy generation and food production:

• "Four of the funds do not invest in the Basic Resources sector.
• The top three do not invest in the carbon-intensive Utilities and Oil & Gas sectors, and have 80%+ invested in low-carbon sectors such as Financial Services, Banks, and Healthcare.
• Three of the funds are underweight in Food & Beverage companies relative to the S&P 500; the other two do not invest in the sector."

Portfolio Footprint vs. the Economy's Footprint

To their credit, Trucost acknowledges that its carbon intensity metrics may not account for the ancillary benefits of a "dirty" company's work:

"Where climate change criteria are included in stock selections, managers may focus on clean technology or renewable energy developers rather than carbon performance from operations. Since operations to develop environmental 'solutions' generate greenhouse gas emissions, these production processes are exposed to carbon costs which are likely to apply across industrial sectors and energy users. [emphasis added]…"

KLD Senior Analyst Andrew Brengle cites the Global Climate 100 index as an example of a solution-driven environmental investment strategy:

"The GC100 is not a carbon-intensity index. Its objective is not to seek out a 100-constituent group with the smallest carbon footprint. Instead, it identifies companies that are pushing the global economy toward a less carbon-intensive state.

"It certainly includes companies with small carbon footprints. But it also includes those with large footprints who are leading the way in carbon intensive industries, such as utilities who have committed to wind and solar power.

"These 'big-footed' companies make a big impact, because they offer leadership where it's needed most."

Investors Look to Government

While some investors already seek to reduce our economy's carbon intensity, many more are concerned with emissions' potential impact on the bottom line.

In assigning a dollar value to companies' carbon output, Trucost assumed a price of $28.24 for each metric ton of greenhouse gas emissions. This cost is, in the US in 2009, purely hypothetical. A national carbon emissions market will make the need for proper accounting more acute.

Though major carbon producers remain politically powerful, the Obama Administration has reaffirmed its commitment to a "gradual, market-based cap on carbon pollution." Even though Congress has blocked the President's attempt to include cap-and-trade in the budget, he continues to promote the idea. Here, thanks to Chris Fox of Ceres, is a portion of the President's April 14 address:

"Some have argued that we shouldn't attempt such a transition until the economy recovers, and they are right that we have to take the costs of transition into account. But we can no longer delay putting a framework for a clean energy economy in place. If businesses and entrepreneurs know today that we are closing this carbon pollution loophole, they will start investing in clean energy now."