Carbon Intensity for Climate Mitigation: Clearing Up “Scaling” Confusion

A quarter of the 500 largest asset managers have set a goal of net-zero carbon emissions by 2050 (Reinders and Heinsbroek, 2021). Carbon intensity (CI)—the measure of greenhouse gas (GHG) emissions scaled by a company’s size—is the key metric investors use to adjust their portfolios to reflect the investment risks and opportunities associated with global warming.

A heated debate is ongoing about which of two popular ways to measure carbon intensity is better: carbon emissions scaled by a company’s revenue—an older measure backed by the Task Force for Climate-Related Financial Disclosure (TCFD)—or carbon emissions scaled by enterprise value including cash (EVIC)—a newer measure proposed by the EU Technical Expert Group on Sustainable Finance (TEG) and codified in EU regulation in July 2020. The TEG’s rationale for using EVIC is that it better reflects a company’s stranded assets.1 This recommendation is receiving significant criticism, however, as opponents of the measure are pointing out a significant growth bias associated with it as well as potentially higher implementation costs.

Unlike the previous research, which suggests that EVIC-based CI is a worse option compared to revenue-based CI, we find that both measures are largely equivalent and are acceptable for investment purposes. Our analysis shows that EVIC-scaled carbon actually leads to somewhat reduced implementation costs (not higher than previously suggested). In addition, our results show that both measures introduce a material growth bias. The EVIC-scaled measure’s bias is slightly stronger, but the difference is much smaller in magnitude compared to the overall bias.