A New Way to Understand the Environmental Impact of Investments

As the drive towards ESG investing continues apace – how can Investors quickly understand the CO₂ impact of their assets?

The current heat-wave in the UK and related national disasters in the Northern Hemisphere –Sweden, Greece, and United States – are once again putting climate change and the constantly increasing average temperature of our Globe to the forefront of public attention.

As greenhouse gas emissions (including CO₂) are one of the main contributors to global warming, we expect higher scrutiny into CO₂ emissions of corporations in the near future.

BlackRock’s letter to CEOs on strategy for long-term growth, and the wider adoption of the TCFD should enforce more climate risk related reporting, and a more thorough consideration of the CO₂ emission and energy usage factors within ESG related investments.

The challenge is to put the nominal emission and energy usage figures into perspective owing to differences in industry characteristics, company size, operational efficiency, and the usage of clean technologies.

The Corporate Emissions Index, discussed in the attached article, provides a framework that takes all these concerns into consideration, and:

1. Assists investment professionals to choose the most productive and energy-efficient companies in a given industry, as it enables easy comparison among peers with different nominal CO₂ emission levels and corporate sizes.
2. Provides industry benchmarks for corporate executives.
3. Tracks the immediate effects of technology change, as the CO₂ intensity factor can be broken down into further subcomponents such as the share of renewables in the energy mix and the CO₂ intensity of fossil fuel consumed.
4. Measures the success of operational changes, and issuance of green bonds through the improvement of energy intensity, and CO₂ intensity of the corporate operation over time.
5. Supports mandate-driven asset allocation between industries, as it highlights the difference in CO₂ intensity among industries.
6. Provides a standardised, non-inflationary, easy-to-calculate scoring mechanism.
7. Helps the comparison with macroeconomic emissions and energy usage.
8. Enables timely monitoring of CO₂ intensity of industries in specific regions for national and supranational regulators.
9. Uses “easily” available, and regularly updated, quantitative corporate data.
10. Applicable to all scopes of CO₂ emissions and such supports the evaluation of corporate supply chain efficiency.

The CEI is the microeconomic adaptation of the modified Kaya Identity. It is calculated as the fraction of the corporate CO₂ emissions and the number of personnel the corporate employs. It is a product of three factors – employee productivity, energy intensity and CO₂ intensity -, that if improved can contribute to more sustainable, and effective corporate operations:

To assess the feasibility of index we analysed the constituents of the STOXX Europe 600 (STOXX600) index. We compared the performance of the industrial sectors across all CEI factors and scrutinized the companies of the Oil & Gas Sector between 2014 and 2016 using Datastream data.

We found amongst all, that:

1. Utilities, Basic Materials, Oil & Gas sectors dwarf all the other industries in CO₂ emissions 
2. Technology and Healthcare sectors are the most notorious in not reporting on their emissions and energy usage.
3. The number and extent of outliers makes the mean as sector descriptive measure highly disinforming. Hence the median and quartiles should be used as the information to compare the performance of industrial sectors and individual companies.
4. TOTAL, Equinor, OMV and Neste stand out as the most investable companies in the Oil and Gas Sector as they:

• Lowered their absolute CO₂ emissions since 2014.
• Improved their CO₂ intensity since 2014.
• Improved their CEI since 2014, with two of them having outstanding employee productivity figures exceeding $2m per person.