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

The Paris climate accord has brought carbon risk management under the limelight more than ever before. Nations are gearing up to provide better transparency around their carbon emissions, which in turn will put pressure on businesses to do so.

The world is on a fast track (and I would like to think so), to economy-wide decarbonisation. The G7 nations have committed to phasing out fossil-fuel subsidies by 2025 and renewable energy has arrived at scale. So, how can investors catch up?

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Engaged Tracking (ET) Index Research is a London based organisation whose mission is to help investors and corporates identify, understand and manage climate and carbon related risks. They offer solutions for investors who would like to reduce their carbon risks without compromising on performance.

In the past, businesses declared their carbon risks based on direct emissions from their own operational activities. 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, its essential to analyse the value chain of the business (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. Scope 3 emissions are critical because they typically make up 75% of companies’ carbon footprints and therefore reveal their exposure to increased costs across their value chain.


The top 2000 companies account for approximately $45 trillion in market capitalization and approximately 9.5 billion tonnes of CO2 indirect emissions. That exceeds the combined total emissions of the United States, Canada and the European Union


The ET Index Series reduce individual investor exposure to carbon risk by shifting capital away from high-carbon companies, while closely tracking the market. They reduce aggregate exposure to carbon and climate risk by indicating to the largest listed companies that they must decarbonise in order to move up the Rankings to gain weighting within the Index.

A higher weighting in the Index would give companies a larger share of invested capital. It also provides investors visibility on firms that are consciously moving up the rankings.

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

It is good to see that the low carbon transition is underway, with carbon intensity falling globally. As a result, investors will be/should be increasingly asking companies to disclose the risks and opportunities arising from climate change.

Thanks to ET Index, carbon footprint reporting will now include Scope 1, 2 and 3 emissions. Better reporting by companies is a must if markets are to identify and price climate risk and direct capital to low carbon opportunities. The US coal sector is in decline and the European power utilities face an existential crisis. It is clear that businesses that ignore the rapidity of the shift to a low-carbon economy will suffer financially. Good times ahead!


Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

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