In a prior note (Measuring the U.K.’s CO2 Intensity Ratio as COP26 Approaches), we looked at carbon emission and carbon intensity levels for the FTSE 350 index. We concluded that both absolute carbon emission levels and the CO2 intensity ratio at an index level have steadily declined since 2013 and 2015, respectively.
Using Refinitiv ESG data, we continue with this analysis by diving into individual companies within the FTSE 350 Index to determine which have made the largest reduction in total CO2 emissions and the CO2 intensity ratio.
We start with total CO2 emissions which measures scope 1 (direct) and scope 2 (indirect) emissions and is measured in tons. To narrow our universe down within the FTSE 350 Index, we filter for companies that have emitted at least 500,000 tons of CO2 in 2020. Once applying this filter, we arrive at Exhibit 1, which highlights the top 10 constituents that have reduced CO2 emissions by the largest amount.
Exhibit 1: FTSE 350 CO2 Emissions
Comparing 2010 vs. 2020, Unilever PLC has reduced its CO2 emissions from 2.6m tons to 778k tons, a 70.0% decline. This is followed by BHP Group (65.5%), SSE PLC (63.3%), Tesco PLC (61.5%), InterContinental Hotels Group PLC (59.3%), WM Morrison Supermarkets PLC (39.4%), BP PLC (39.3%), GlaxoSmithKline PLC (35.2%), Mondi PLC (32.4%), and Rio Tinto PLC (28.7%).
It is encouraging to see many of the largest commodity companies from the Energy and Materials sector included in the top 10. Note that annual reported data can be impacted if a company divests an energy intensive business.
We also incorporate the latest ESG scores using Refinitiv Workspace and see a strong correlation between lowering emissions and obtaining a high ESG rating.
All the companies in Exhibit 1 have an ESG rating above B and many are rated A and above. Looking at the E S and G pillars individually also shows the same trend. Companies that have a rating of A and above demonstrate excellent relative ESG performance and a high degree of transparency in reporting material ESG data publicly.
Note that a company’s E and S score are ranked relative to its industry group peers using the Refinitiv Business Classification Scheme. The G factor is ranked amongst peers who have the same country of incorporation.
CO2 intensity ratio
While absolute CO2 levels are important, it also makes sense to compare this metric to the annual revenues a company generates to provide an apples-to-apples comparison. CO2 intensity is defined as CO2/Revenue ($ million), which is conveniently available in Refinitiv Eikon Workspace as a pre-calculated data field.
A lower carbon intensity ratio is desirable as this results in companies either a) lowering absolute CO2 levels or b) maintaining CO2 levels but increasing revenue over time, yielding greater efficiency in CO2 emissions per dollar in revenue.
Exhibit 2 highlights the top 10 constituents that have decreased their CO2 Intensity ratio by the largest amount since 2010.
Exhibit 2: FTSE 350 CO2 Intensity Ratio
We see many of the same companies as in Exhibit 1 with a few exceptions including Centrica PLC, British American Tobacco PLC, and Anglo American PLC, which also have strong ESG ratings.
Does lower carbon lead to greater financial performance?
To answer this question, we utilize the FTSE UK Low Carbon Index available in Refinitiv Eikon Workspace (RIC: .FTELCGBRS).
The index looks to include companies with metrics including a) Operational Carbon Emissions Intensity reduction of 50%, b) a Fossil Fuel Reserves Intensity reduction of 50% and c) an ESG uplift of 20%. In addition, the index excludes companies who violate the United Nations Global Compact Principles controversies list.
Using the rebasing charting app in Refinitiv Eikon Workspace, we can chart this index vs. the FTSE 350 index over the last 10 years as shown in Exhibit 3.
Exhibit 3: Price return of FTSE UK Low Carbon Index vs. FTSE 350 Index.
Source: Refinitiv Eikon Workspace
Looking at price returns only; the FTSE UK Low Carbon Index has outperformed the FTSE 350 Index over the last 10 years by approximately 25 percentage points (34.6% vs. 9.1%). There has been a notable period of outperformance since the peak of the COVID-19 pandemic in March 2020.
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