|Core Portfolio-Level Metrics
|Absolute or Intensity
|Economic Emissions Intensity
|Weighted Average Carbon Intensity (WACI)
It is important to understand how the components underlying these metrics have changed, which is shown in Table 1 below, using annual percentage changes. We also consider the total emissions of Orsted, which shows the company has been successful in decarbonising its operations.
Table 1: Orsted carbon metrics – understanding changes in underlying components
“When considering carbon emissions, what matters more to investors is not where carbon emissions are today, but rather where they will be in the future….”
So which metric should investors choose?
Each carbon metric will answer a slightly different question:
- WACI provides insight into a company’s carbon efficiency per dollar of revenue earned and is a useful metric for comparing companies within sectors
- Economic Emissions Intensity is a useful measure to understand the carbon intensity relative to the value invested and allows for asset management growth of a portfolio to be normalized
- Financed emissions provide an important absolute view of emissions "owned" by different investors. However apportioning based on % of EVIC-owned is still imperfect since changes may be driven by volatility affecting the market values of company equity and debt
Since all these metrics have strengths and weaknesses, in our view, it’s imperative to track them all. Moreover, short-term volatility illustrates the need for disaggregation. To capture the full picture, investors may also wish to track total company emissions as shown in Table 1.
When considering carbon emissions, what matters more to investors is not where carbon emissions are today, but rather where they will be in the future…
The importance of a forward-looking view
When considering carbon emissions, what matters more to investors is not where carbon emissions are today, but rather where they will be in the future for a company or portfolio. To obtain this forward-looking view of emissions, we think it prudent to focus on three key components:
- Absolute emissions: This can be obtained from climate scenario analysis emission forecasts and credible company targets
- Revenues: These can be assumed to grow at a constant percentage in line with economic growth
- EVIC: Forecasting EVIC is a lot more difficult and prone to volatility, therefore posing challenges for investors with long-term view
When intensities are being forecasted, it's imperative that investors clearly outline the underlying assumptions made in terms of revenue and EVIC growth.
What are the key implications for investors?
- All three carbon metrics should be disclosed and disaggregated
The choice of carbon metric matters — all metrics provide investors with different, sometimes opposing views on carbon and should be disclosed.
Disaggregating the metrics is necessary to examine the underlying drivers of change, particularly in cases where changes in carbon metrics are unrelated to carbon fundamentals. For example, when changes in EVIC are due to market volatility, or when revenue shocks impact final results.
It can also be beneficial to consider total company absolute emissions to complement the carbon metrics. However, it must be understood that normalizing emissions is important and necessary for investors to compare companies of different sizes and funds of different sizes.
- Most importantly, we need a forward-looking view on carbon and credible targets
Investors may do well to complement backward-looking carbon metrics more forward-looking views using scenario analysis, corporate emissions targets and an assessment of their credibility, as well as green revenues and green capex data. These elements all support the development of a forward-looking view on carbon. It's important to be aware that data availability can sometimes be sparse and forward-looking methodologies are are relatively nascent. Nevertheless, we think that investors may do well to seek to incorporate this type of data as best as possible, using an approach that transparently accounts for any data gaps.
- Focusing on carbon metrics alone is not sufficient for real-world decarbonization
Using carbon metrics alone will leave investors at risk of making decisions that are misaligned with climate goals. It is crucial that carbon emissions are measured, reported and benchmarked. We believe that supporting real-world decarbonization also requires strong active ownership and other net zero-focused investment solutions.
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Discussion of individual securities above is for informational purposes only and not meant as a buy or sell recommendation nor as an indication of any holdings in our products. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of any mentioned securities.
Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.