ET Carbon Rankings Methodology


    Companies are analysed using a strict quality control framework in order to ascertain a greenhouse gas emissions- intensity metric (tCO2e/$m revenue). 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.

    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 and 2 intensity figure is calculated based on the total disclosed Scope 1 and 2 emissions divided by USD million of revenue (Scope 1 and 2/$m revenue). The same applies to Scope 3.

    In cases where a company is not reporting complete information, an inference system is applied. The highest reported emissions- intensity figure from a disclosing company within the most appropriate peer group is applied to the non-disclosing company. This inference is carried out at the most granular industry level possible. For Scope 3, the inference system is applied to each category. This is not an estimate of the company’s emissions; rather it is a means of penalising non-disclosure in order to provide an incentive for disclosure.

    The ET Carbon Rankings integrate the Sustainable Industry Classification SystemTM (SICS®) from SASB®, the Sustainability Accounting Standards Board®. The SICS categorises 10 sectors and 80+ industries in accordance with their resource intensity, sustainability impact, and sustainability innovation potential.

Scope 1, 2 & 3 emissions

The Greenhouse Gas Protocol, developed by the World Resources Institute and the World Business Council on Sustainable Development, sets the global standard for how to measure, manage, and report greenhouse gas emissions.

  • Scope 1 Emissions – direct emissions from a company’s operational activities.
  • Scope 2 Emissions – indirect emissions generated from the purchase of electricity.
  • Scope 3 Emissions – all other emissions over which the company has influence but not control, such as distribution of goods, transportation of purchased goods, transportation of waste, disposal of waste, employee commuting, business travel or investments.

Disclosure categories:

  • Public, complete Scope 1 and 2 data, third-party assurance.
  • Public, complete Scope 1 and 2 data, no third-party assurance.
  • Incomplete Scope 1 and 2 data, no third-party assurance.
  • No public data.

Data definitions:

  • Complete data is defined as data covering at least 95% of a company’s worldwide Scope 1 and 2 emissions within an appropriately chosen reporting boundary. Where there is only partial data available, the ET Carbon Ranking methodology accepts a company reporting extrapolated data to achieve 100% coverage for their operations, as this is permissible under the GHG Protocol Corporate Standard, providing the end result is a faithful reflection of a company’s emissions.
  • Incomplete data is defined as data which represents less than 95% of a company’s worldwide operations; data that is expressed as an intensity metric, such as the amount of CO2 emitted per product produced, rather than as an absolute figure; or data which is not reported clearly under the GHG Protocol definition of Scopes 1, 2 and 3.
  • Assured data is defined as having a bona fide independent assurance statement without significant qualification.
  • Public data is defined as freely available information reported in a company’s sustainability report, annual report, or sustainability-related section of its website (or any other relevant section of the company’s website).
  • Third-party reporting on behalf of a company, which may involve restrictions or permissions (e.g. reporting to the CDP), is not defined as publicly and freely available.

Overcoming the lack of data:

    In the case where a company is reporting a carbon emissions figure for a Scope 3 category, e.g. business travel, this number is accepted. In the case where a company is reporting each of the 15 Scope 3 emissions disclosure categories, each of these emissions figure totals are accepted.

    In the case where a company is not reporting a carbon emissions number for any given Scope 3 emissions category, the ET Index Research inference system is applied. The highest reported Scope 3 emissions-intensity figure for that Scope 3 category, within the most granular industry level possible, is applied to the non-disclosing company. This is the same logic that is applied across the universe for Scope 1 and 2 emissions and is designed to make use of as much reported Scope 3 data as possible. It also enables Scope 3 data to be included in the overall calculation of a company’s carbon footprint, even though the data disclosed is not yet perfect across the board.

    Where no data is available for a given Scope 3 category at the sector level, the highest reported emissions intensity for that category, from any company in the Rankings Universe, is used. This is irrespective of the sector.

Disclosure requirements, current emissions and intensity:

    The ET Carbon Rankings seek to enhance the disclosure of accurate Scope 1, 2 and 3 emissions data to an ever-higher standard each year across all public companies. From a technical point of view, the ultimate metric for investors to consider when incorporating carbon risk into their valuations of companies would be the net present value of emissions over time. That is, the expected discounted value of the change in cash flows, relative to business as usual, of a company due to its GHG emissions exposure.

    The current emissions-intensity of a company is a key input into the equation for this net present value of emissions, just as an estimate of a company’s current dividend amount is a core parameter in the dividend discount model of stock prices. While analysts may debate the right dividend growth rate number or the right emissions cost growth rate, the current dividend amount and the current emissions-intensity of a company are observable. These observable quantities set the starting point for forecasts of future dividends and future emissions amounts, respectively.

    To assess the current emissions-intensity of a company, information on the current emissions of that company is required. This must include all relevant Scope 1, 2 and 3 emissions, so that both direct and indirect costs can be estimated.

    ET Index Research asserts that the process of calculating and publishing Scope 1, 2 and 3 emissions-intensities is consistent with the seven fundamental principles identified by the FSB Task Force on Climate-related Financial Disclosures to be:

  • present, relevant information;
  • specific and complete;
  • clear, balanced, and understandable;
  • consistent over time;
  • comparable among companies within a sector, industry, or portfolio;
  • reliable, verifiable, and objective; and be provided on a timely basis.