Why the choice of carbon metrics matters

Investors are increasingly setting climate ambitions and integrating climate considerations into investment decisions. This means navigating the complex world of carbon metrics. But with multiple metrics to consider, how do investors make the right choice?

The core carbon metrics

Over the past eight years, a combination of the initial 2017 Taskforce on Climate-related Financial Disclosures guidance and further enhancements from the Partnership for Carbon Accounting Financials has led the investment industry to coalesce around three core carbon metrics for public markets: financed emissions, economic emissions intensity and weighted average carbon intensity (WACI).

Why are there multiple metrics?

Similar to financial ratios, like P/E (price-to-earnings) ratio or EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization), investors should not rely on just a single metric. Each metric measures something slightly different, with a unique set of nuances. This leads to industry groups, such as the Institutional Investor Group on Climate Change (IIGCC), to recommend a ‘dashboard’ approach, using multiple metrics. This is something for which Aberdeen Investments has long advocated.

 

Company example

In figure 1, we look at the battery manufacturer, Samsung SDI, to compare carbon metrics. We are using the period 2019 to 2023 to reflect the year of emissions (note that emissions data often comes with a 12–24-month time lag).

Firstly, we can see that Samsung SDI’s total Scope 1 and 2 operational emissions have been increasing. This should not come as a surprise given the company is in a growth phase. The increase in emissions reflects growing demand for batteries that are enabling decarbonisation in transport and power.

This is where carbon intensities become particularly relevant. It would be a positive signal to see a reduction in emissions per unit of revenue and per unit of EVIC. However, what we see (as per figure 2) is that the two different carbon intensities of Samsung SDI diverge from one another. 

This divergence is driven by the denominators of the respective carbon intensity metrics.

As per figure 3, we can see that revenues rise from 2020. However, due to the competitive dynamics in battery manufacturing and high capital expenditure intensity, Samsung SDI has seen its EVIC fall as its share price has declined.

Company example: Exxon Mobil versus BP

Crucially, these dynamics become even more stark when comparing peer companies. Consider the oil & gas sector between 2020 and 2023. The sector experienced a revenue shock from Covid-19 lockdowns and a subsequent revenue boom due to the energy crisis. 

While both Exxon Mobil and BP have made efforts to reduce their Scope 1 and Scope 2 emissions,, their carbon intensity metrics tell a more nuanced story. For example, despite BP’s more consistent decarbonisation, Exxon Mobil appears to be improving faster when viewed through the lens of WACI and EEI. This divergence is driven by changes in revenue and EVIC, rather than emissions alone.

In both charts (figures 4 and 5), we can see the 2020 impact of Covid-19 lockdowns. A drop in revenues corresponds with a higher WACI, and a drop in EVIC corresponds with a higher EEI.
Revenues and EVICs recover after 2020, but this is more pronounced for Exxon Mobil. This has the impact of a drastically different trend in carbon intensity between the two companies, which is not reflected in the change in total Scope 1 and 2 emissions.

In short, if investors only focus on carbon intensities, they would see Exxon Mobil as decarbonising at a faster rate than BP.

 

Investors may question the efficacy of carbon intensities. However, they still provide useful information. Despite the divergent year-on-year changes, we can still see that BP is more carbon efficient than Exxon Mobil, and that both companies are becoming more carbon efficient. Without this data, we would not be able to make these assessments.

Carbon intensities trend downwards

While carbon intensities are informative, the examples above illustrate how changes in carbon intensity are detached from changes in total ‘real-world’ emissions.

At the index level, carbon intensities tend to trend downwards. This is because, on average, revenues and EVICs increase at a faster rate than emissions.

For example, from 2019 to 2023 across the MSCI World Index, revenues have increased by an average of 43%, while emissions have increased just 6%, on average. 

This means that even if emissions are increasing, carbon intensities are falling. While carbon intensities are still useful for measuring emissions per unit of revenue or EVIC, they are clearly detached from absolute total emissions.

However, over the past eight years, climate metric developments have not been isolated to just portfolio carbon metrics. Other frameworks, such as the Net-Zero Investment Framework (NZIF), have increasingly come to the fore. This framework uses six criteria to determine a company’s level of alignment in supporting the low-carbon energy transition (see figure 6).

The NZIF considers bottom-up asset-level information that helps inform a forward-looking view of a company, both in terms of its emissions profile but also its fundamental business model and financials. Using the NZIF framework with the same MSCI World Index universe, we see that companies higher up the NZIF alignment scale decarbonise in absolute total emissions terms (figure 7).

Carbon in a portfolio context

Many investors consider portfolio emissions relative to a benchmark. However, it’s crucial investors only do so in the context of their investment and sustainability objectives.
This is particularly relevant because emissions are heavily concentrated in just a few sectors, and therefore benchmark emissions are a representation of underlying sector biases. This is where carbon attribution analysis becomes critical and can help provide clarity to investors as to whether it is stock selection or sector allocation that is driving higher portfolio emissions relative to a benchmark

The reality is that rather than relying on one metric, investors should use multiple carbon metrics, and they should be aware of the purpose of each metric.

Final thoughts…

Portfolio carbon metrics play an important role in measuring emissions, but they are imperfect. Rather than relying on a single measure, investors should use a combination of metrics to gain a fuller picture. At Aberdeen Investment, we take a dashboard approach — using all three core carbon metrics to understand their underlying drivers, and placing greater weight on long-term trends over short-term fluctuations.

Moreover, when comparing portfolios to a benchmark, we use attribution analysis to assess what drives relative emissions, and how sector allocation compares to stock selection. 

Lastly, framework such as NZIF portfolio alignment help address certain limitations of carbon metrics. It gives investors a clearer view of which companies are driving ‘real-world’ decarbonisation through their strategies and capital allocation. We believe NZIF alignment is not only a forward-looking indicator of emissions, but also a valuable lens into how companies are approaching the energy transition in their strategy and capex plans, which is ultimately central to any investment case.