ET Carbon Rankings Methodology

ET Carbon Rankings Methodology

The ET Carbon Ranking Series publicly tracks the carbon emissions of the world’s largest companies and their supply chains. The rankings are designed to incentivise continuously improving carbon reporting and emissions reduction by corporates. The rankings are used to determine company weightings in the investable ET Low Carbon Index Series.

Methodology overview

Companies are analysed by ET analysts using a strict quality control framework in order to ascertain their greenhouse gas emissions intensity (tCO2e/USDm revenue).

The 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 Scope 1 (direct), Scope 2 (indirect electricity) and Scope 3 (value chain) emissions.

Engaged Tracking uses ‘carbon’ and ‘greenhouse gas’ emissions interchangeably as shorthand for Scope 1, 2 and 3 emissions as defined by the GHG Protocol. Emissions are always expressed as tonnes of carbon dioxide equivalent (tCO2e).

The ET Carbon Ranking methodology assesses companies according to their Scope 1, 2 and 3 greenhouse gas emissions in order to identify the complete carbon footprint of each company. Scope 3 emissions typically account for more than 75% of a company’s total emissions.

For Scope 3 emissions, the ET Carbon Ranking methodology analyses each reported Scope 3 emissions category, combining each of the 15 Scope 3 emissions categories totals to calculate total Scope 3 number.

To ensure the integrity of the data, the ET Carbon Ranking methodology includes a thorough assessment of outliers in company reported emissions. Outliers are brought in line with the valid data range with a 95% confidence interval (winsorized). Outliers that have been third-party assured are investigated further by ET analysts and accepted or rejected based on their analysis. Outliers that are not third-party assured are automatically rejected.

Treatment of companies disclosing incomplete or no public data is explained in more detail below.

Data sources include annual reports, sustainability reports, company websites and public disclosures to CDP’s climate questionnaire. The completeness of the data and whether the information has been audited by an independent third party is also assessed. The ET Carbon Ranking Series methodology classifies each company into one of four disclosure categories.

ET Disclosure Categories & Data Definitions

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

Complete data

Complete Scope 1 and 2 emissions data is defined as data covering at least 95% of a company’s worldwide emissions within an appropriately chosen reporting boundary in accordance with the Greenhouse Gas Protocol (GHG) Corporate Standard. Where there is only partial data available, the ET Carbon Ranking Series 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

Incomplete Scope 1 and 2 emissions data is defined as data which represents less than 95% of a company’s worldwide emissions. In addition, data reported as an intensity metric, e.g. CO2 emitted per product produced, rather than as an absolute figure of tCO2e is considered incomplete since this is not permitted under the GHG Protocol Corporate Standard.

Third-Party assurance

The ET Carbon Ranking Series methodology considers a company to have third party assurance provided a bona fide assurance statement is available from an independent third-party that validates the reported data. The assurance must cover at least 95% of a company’s worldwide Scope 1 and 2 emissions. The accepted assurance standards are aligned with those accepted by CDP and can be viewed here.

Public data

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).

As of 2017, data reported by companies directly to CDP (and allowed to be made public) is accepted as public data for the purposes of the ET Carbon Ranking Series.

Data provided by a company directly to Engaged Tracking but that is not publicly available, and therefore not independently verifiable by the general public, is not accepted as ‘public data’.

ET Inference methodology: treatment of companies disclosing Incomplete or No Public Data

Objective

The ET Carbon Ranking Series methodology is designed to incentivise the disclosure of complete Scope 1 and 2 emissions and Scope 3 emissions for material Scope 3 categories by all companies.

In order to achieve this objective, companies disclosing Incomplete or No Public Data always rank lower than their industry peers that disclose Complete Data.

Methodology

Companies in Incomplete or No Public Data disclosure categories are assigned a ‘surrogate score’ under the ET Inference methodology. The ‘surrogate score’ (called the ET Inferred score) represents the worst emissions-intensity score from a company disclosing complete data within the same industry.

Assigning this worst-case carbon emissions-intensity surrogate score from an industry peer that does disclose is intended to:

    • 1. Penalise companies for non-disclosure of carbon emissions information;
    • 2. Appropriately recognise companies that do disclose this information; and,
    • 3. Ensure that disclosing companies always rank better than non-disclosing companies in the ET Carbon Ranking Series.

For Scope 1 and 2 emissions, the ET Inferred score is taken from an industry peer at the most granular industry level possible, provided there are enough disclosing companies at the industry level. In cases where there are not enough disclosing companies at the industry level, an ET Inferred worst case score is taken from the sub-sector level. In the event there are not enough disclosing companies at the sub-sector level, the ET Inferred score is the worst case score taken from the sector level.

For Scope 3 emissions, the process described above is applied at the level of each individual Scope 3 disclosure category within each industry. Where there is not enough at the industry level the process is applied at the subsector or sector level.

Why the ET Carbon Ranking Series uses the Sustainable Industry Classification System (SICS)

Traditional industry classification systems, such as the Industry Classification Benchmark (ICB) or the Global Industry Classification Standard (GICS), have been slow to adapt to the transition to the low carbon economy now underway. For example, neither system includes the 'Renewable Resources & Alternative Energy' (Renewables) industry recognized by SASB in the SICS™.

Because neither GICS nor ICB classifies 'Renewables' as an individual sector, non-disclosing Renewables companies would, as a consequence, have been benchmarked against the worst performers from within the Oil, Gas and Coal sector under the ET Inference methodology.

Additionally, as there are comparatively few Renewables companies, 'ET Inferred' data for non-disclosing Renewables companies would have been drawn from the top-level 'Energy' sector based on the ET Carbon Ranking Series methodology. Comparing emissions intensities of Renewables companies with those of even the best-performing fossil fuel companies presents significant challenges if one were to rely solely on GICS or ICB.

The purpose of the ET Carbon Ranking Series is to incentivise reduction of GHG emissions and improve disclosure thereof. Therefore, penalising Renewables companies in this manner is not in line with its objectives.

The Sustainable Industry Classification System™ (SICS®) from the Sustainability Accounting Standards Board SASB® categorises companies into 10 sectors, 35 subsectors and 80+ industries in accordance with their resource intensity, sustainability impact, and sustainability innovation potential.