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Measuring Greenhouse Gas Intensity

Part One of the Intelligent Metric Series

Measurement without action is impact washing. Plain and simple. However, without metrics to track progress, there is no way to know whether changes in business (or investment) strategy actually made a difference. There’s also no way to confidently iterate strategies over time to ultimately achieve the desired outcome. At Proof, we have been helping businesses and investors across six continents track progress on their ESG and impact goals. This is why we are starting this Intelligent Metric series to share some of the lessons we’ve learned over the past three years on how to most effectively track progress, identify risk, and use data for action. This article is the first of a series on perhaps the most critical metric of all: greenhouse gas (GHG) emissions.

Climate change is one of the most pressing issues of our time. Global regulators are now making the measurement and reduction of GHG emissions a top priority. In the US, the Securities and Exchange Commission (SEC) has proposed a rule that will require publicly listed companies to report their GHG emissions, including emissions generated by private companies involved in their entire supply chains. This will create a seismic shift in the need for private companies to also measure, report, and reduce their emissions.

Meanwhile, the Sustainable Finance Disclosure Regulation (SFDR) developed by the European Commission requires investors located in the EU to begin measuring and disclosing the emissions of their companies and products. ESG and impact funds located in other countries will also face increasing pressure – and competition – to share their SFDR data with EU investors, as this is necessary for EU investors to market their products as sustainable.

The rapid pace at which such legislation is being introduced means investors and businesses in the US and globally that haven’t yet considered the measurement and reduction of their GHG emissions must do so, and with some urgency.

Computer screen with data

One of the biggest issues organizations will face, however, is the inaccuracy inherent in focusing solely on absolute emissions, which measures the total metric tons of carbon equivalent emissions generated, but does not take into account the many factors that affect a company’s emissions profile. Another metric that also needs to be tracked is GHG emissions intensity, which accounts for a company’s size (in revenue generated), or other factors such as the amount invested in a company (for investors). GHG intensity metrics, when coupled with absolute GHG emissions, together provide a much clearer lens through which to view a company’s true carbon footprint and how it compares to similar peers.

GHG intensity metrics

Globally, the unit typically used to report GHG emissions is the absolute number of metric tons of carbon dioxide (CO2) equivalent emissions. Absolute equivalent CO2 emissions by itself, however, is a crude metric that does not take into account the nature of the companies that are often required to reduce their carbon footprint. In order for companies, and their investors, to be able to compare performance within a given industry, and identify the greatest room for improvement, a far more analysis- and action-oriented metric to consider is GHG intensity.

The two prevailing GHG intensity metrics for companies and investors to consider include:

  1. Weighted Average Carbon Intensity (WACI): This is the intensity metric recommended by the Taskforce on Climate-Related Financial Disclosure (TCFD) in 2017. It is calculated by measuring absolute GHG emissions (in metric tons) per $1 million of revenue earned by the company.
  2. Economic Emissions Intensity: This is the intensity metric recommended by the Partnership for Carbon Accounting Financials (PCAF) in 2020, specifically designed for investors. It is calculated by measuring absolute financed emissions (i.e., metric tons of emissions based on the percentage of enterprise value including cash (EVIC) owned by the investor), per $1 million of investments in the company.

The advantages to the reporting company and investor are obvious in that this metric can be seen to relate to the scale of the company in question. When combined with absolute measurements of GHG emissions, GHG intensity provides a powerful diagnostic tool, showing longitudinal progress as well as point-in-time comparison. This is crucial as we know that incoming regulations will require such metrics for comparative purposes across entire economic sectors and industries.

We believe that the GHG intensity metric, especially when utilized in conjunction with absolute GHG emissions, is one of the most powerful metrics moving us towards our impact objectives.

Normalizing data for benchmarking

A critical feature of the GHG intensity metric is that it allows companies to normalize the raw data. In the simplest cases, normalization means adjusting values measured on different scales to a common scale. This allows stakeholders to know how much environmental impact companies have relative to a given amount of goods and/or services produced.

Normalized data can be particularly helpful in demonstrating environmental improvements in a growing organization. By using GHG intensity metrics, company-wide and industry-wide data becomes more meaningful and useful. Quite naturally, there are other metrics that fulfill a similar function by measuring, for example, GHG emissions per employee. As such, normalization is critical for benchmarking, or comparing different companies within or across industries in a like-to-like fashion.

Measuring tape

Take, for example, two pharmaceutical companies operating in the same sub-industry with similar markets and geographies. Both have 100,000 metric tons of absolute GHG emissions in 2021, however, Company A is larger ($1 billion revenue) than Company B ($750 million revenue). Company A and B look the same in terms of absolute emissions, but their intensity is much different: Company A’s intensity is 100 whereas Company B’s intensity is 133, meaning Company A is emitting fewer emissions per $1 million in revenues earned. There could be a number of reasons for this, such as Company A using more renewable energy, converting to an electric vehicle fleet, or partnering with energy-conscious suppliers.

Without benchmarking, companies and investors are operating in the dark, unable to know how industry peers are performing and what the leaders are doing to advance. With benchmarking – which will emerge at a much larger scale and with higher fidelity due to incoming regulations – companies will be able to see where they are underperforming in comparison to their peers, learn the best practices, and implement them to take decisive action through new initiatives, innovative management techniques, or by adapting their business strategy. At the same time, investors can see where their portfolio companies are lagging and take action through shareholder voting, collaboration intervention with other investors, and other active ownership techniques.

Man running next to smokestacks releasing pollution

The Proof GHG solution

Proof now has a consolidated intelligent metric catalog and selection process that allows our clients to focus on moving beyond absolute numbers into normalized metrics. Our goal at Proof is the same as it is for governments, companies, investors, climate stakeholders, and shareholders alike: net-zero GHG emissions in the shortest possible period of time. This is why we believe that the GHG intensity metric, especially when utilized in conjunction with absolute GHG emissions, is one of the most powerful metrics moving us towards our impact objectives.

The result is increased benefits for all stakeholders – from the individual level right through to society as a whole. It is, in short, a win-win situation for all. With regulation becoming ever more widespread and comprehensive, any company operating without intelligent measurement can only fall behind.

Evan Vahouny, MPP, is the Chief Impact Officer at Proof, a global data intelligence company providing end-to-end tools for ESG and impact management. We are on a mission to help purpose-driven organizations realize their full potential by optimizing for purpose and profit simultaneously.

This article was produced in collaboration with the Magazine's Content Partners.

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