Carbon risk management: Engaged Tracking (ET) Index sets gold standard

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In recent years we have begun to take note of the impact we have on the environment around us more than ever before. Plastic is the prime example, with cafes and restaurants cutting down on plastics (in the UK Starbucks now charge 5p for a takeaway paper cup) and the introduction of the 5p bag carrier bag charge. Since the Paris climate accord in 2017, our carbon emissions have been scrutinized too, with an ever-increasing number of nations striving to become more transparent, which will put further pressure on businesses to do the same.

Last year, the G7 nations committed to phasing out fossil-fuel subsidies by 2025 and renewable energy has arrived at scale. So, how can investors catch up?

Global rankings - carbon emissions

Global rankings – carbon emissions

Based in London, there’s one organisation whose mission is to help investors and corporates to just that, by helping them identify, understand and manage climate and carbon-related risks. This organisation is Engaged Tracking (ET) Index Research, which offers solutions for investors looking to reduce their carbon risks without compromising on performance.

Businesses previously declared their carbon risks based only on their operational activities, and these were known as direct emissions. However, as per ET Index research, direct emissions (termed as Scope 1 and 2), make up only 25% of a business’ carbon footprint. In order to get the full view of a business’ carbon efficiency, it’s essential to analyse its value chain (termed as Scope 3).

Rankings

The ET Carbon Rankings calculate the carbon emissions of the world’s largest 2000 listed companies – including scope 3 emissions – from transportation of raw materials to the use of the products they sell. It doesn’t take a rocket scientist to work out that Scope 3 emissions typically make up 75% of companies’ carbon footprints and as such are of critical importance, as they reveal their exposure to increased costs across their value chain.

These companies account for approximately $45 trillion in market capitalisation and in the region of a whopping 9.5 billion tonnes of indirect CO2 emissions. To put this figure into perspective, this exceeds the combined total emissions of the United States, Canada and the European Union.

The ET Index Series reduces individual investor exposure to carbon risk by closely tracking the carbon emissions of companies and, by means of a league table, discouraging individuals from investing in those with a high-carbon output. In order to move up the rankings in the index, companies must decarbonise.

In short, the higher a company ranks in the index, the larger the share of invested capital they receive. The index also provides It also provides investors visibility on firms that are progressively and consciously moving up the rankings

In March 2017, ET Index became a member of the Social Stock Exchange (SSX – the world’s first regulated exchange, dedicated to businesses and investors seeking to achieve positive social and environmental impact.

It is encouraging to observe that the low carbon transition is underway, which is reflected by fall in carbon intensity globally and investors should now be asking companies to disclose the risks and opportunities arising from climate change much more frequently.

More detailed, responsible and transparent reporting by companies is a must if markets are to identify and price climate risk and direct capital to low carbon opportunities. With the US coal industry in decline and the European power utilities face an existential crisis, it is clear that businesses which ignore the inevitable shift towards a low-carbon economy will almost certainly suffer financially.

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