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Carbon risk has become a major part of comprehensive risk analysis within investment portfolios. As pressure to reduce carbon emissions increases, the profitability of high-carbon companies will suffer. Consequently, investors need to know how public policy and the shift away from fossil fuels is impacting their portfolios. The ET Index platform provides a simple solution to this problem, allowing investors to identify and understand carbon risk exposure, so that they can manage it effectively.

The ET Index Data Universe

The bedrock for the ET Carbon Data is an in-house analysis of the world’s largest listed companies, representing approximately 85% of global market capitalisation. The ET Emissions Inference Algorithm integrates the new Sustainable Industry Classification System™ (SICS®) from SASB®, the Sustainability Accounting Standards Board®, and historical carbon emissions data. This inference algorithm enables the inclusion of any security in the footprinting analysis.

ET Carbon Data

• Strict quality control framework to assess the integrity and completeness of a corporation’s publicly-disclosed emissions data.
• This framework has been developed and tested over the last 4 years by the Environmental Investment Organisation (EIO), a not-for-profit research body.
• Analysis based on the Greenhouse Gas Protocol, the most widely-accepted standard for greenhouse gas emissions accounting.
• Corporate emissions data must cover at least 95% of a company’s operations in order to be considered complete.
• Third-party assurance defined as a bona fide assurance statement to a recognised international standard, e.g. ISO 14064.
• Full transparency over whether company data is self-disclosed or inferred in the case of incomplete public data.

Key differentiators

• Draws upon more than 4 years of experience analysing corporate carbon emissions data.
• Utilises the Sustainable Industry Classification System (SICS) which categorises 10 sectors and 80+ industries in accordance with their resource intensity, sustainability impact, and sustainability innovation potential.
• Assesses trends within each industry and analyses the performance over time of each company and each industry.

Example uses

• Asset Owner with limited internal resources wishing to quickly and easily assess the carbon footprint of their investment portfolio.
• Investment Institution wishing to publicly-disclose their portfolio carbon-footprint as part of the Montreal Pledge.
• Pension Fund wishing to model future carbon price scenarios and stress test their impact on a portfolio.
• Hedge Fund Manager looking to assess the carbon risk in a portfolio and use emissions data to search for alpha generating opportunities.

Methodology underpinning the data

The largest global companies by free-float market capitalisation are analysed using our strict quality control framework in order to ascertain a greenhouse gas emissions intensity metric (tCO2e/$m), allowing for normalised comparison.

The analysis framework for gathering this information is based on the Greenhouse Gas Protocol, the most widely used international accounting tool for greenhouse gas (GHG) emissions. The GHG Protocol classifies GHG emissions according to three scopes: (Scope 1) direct emissions from a company’s operational activities; (Scope 2) indirect emissions generated from the purchase of electricity; (Scope 3) all other emissions over which the company has influence but not control, such as the use of sold products. Please see below for a diagramatic overview of the three Scopes.

Data sources include annual reports, sustainability reports and company websites. The completeness of the data and whether the information has been audited by an independent third party is also recorded. For each company, a Scope 1+2 intensity figure is calculated based on the total disclosed Scope 1+2 divided by USD million of revenue (Scope 1+2/$Mturnover). The same applies to Scope 3.

Calculating the Carbon Intensity of an Investor Portfolio

Intensities for portfolios and indexes are calculated as weighted averages of the intensities of the individual securities contained within a given portfolio or index. To read the full methodology used to calculate the carbon intensity of a given portfolio, please refer to the ET Carbon Footprint Analysis Brochure.