EIO – Carbon Ranking Methodology Explained

The EIO’s new environmental tracking carbon index methodology deserves a short explanation because it highlights the complex ecologic, economic and political context of carbon ranking. First, one has to consider the multiple goals of the ranking: It aims both at measuring reliably and comprehensively corporate greenhouse gases emission (GHG) intensity as well as at incentivising companies to become more transparent about their emissions and to verify GHG data. These requirements translate into a rather complex methodology, which I will try to explain in three steps. Please note that corresponding to the EIO’s transparency goal, only publicly available data was considered.

  1. Companies are ordered in four categories according to their level of disclosure of scope 1 & 2 (direct emissions) and verification. Categories include: Complete/verified, complete/not verified, incomplete, no data. Reasoning: This is the core of the ranking. The EIO rewards companies that disclose complete and verified data, inciting companies to improve their reporting standards. As disclosure improves in the future, this first step will automatically become less decisive for the rankings.
  2. Within each of these four categories, companies are ranked according to the number of scope 3 categories (indirect emissions) reported. Reasoning: It is the EIO’s declared goal to progressively enlarge the scope of the ET carbon rankings to include scope 3 emissions. A company’s real GHG efficiency and global warming impact can only be correctly assessed by including indirect emissions. While the available data does not yet allow for fully including the amount of scope 3 emissions, factoring in the number of scope 3 categories does provide incentives to companies and helps them to prepare for future full integration of scope 3.
  3. Finally companies within the same category and disclosing the same number of scope 3 categories are ranked according to their GHG intensity; scope 1 & 2 + 50% of scope 3 emissions per turnover. Reasoning: Scope 3 data is still considerably less reliable and complete than scope 1 & 2 data. Completely discarding it would make the ranking incomplete, completely including it, would risk distorting the ranking to an unacceptable degree. The EIO found an elegant solution to this problem by first only including the amount of reported categories instead of using actual (relatively unreliable) data in the second step. In the third step scope 3 data is included with 50% of recorded data, expressing its limited analytical value compared to scope 1&2 data. In order not to disadvantage disclosing companies over non-disclosing ones, the highest reported emissions in an economic sector are applied to all companies failing to provide data.

What are the implications of the new ranking for politicians? As I mentioned in the first article, it is obvious that investors as well as politicians need better emission data in order to take qualified decisions, for example as to where to invest or whom to award public purchase orders. Companies should therefore be required to report complete and verified GHG emission data. The standards are here, the instruments as well, a simple law without any other duties or complex regulations would enable the market to incentivise companies to become more CO2 efficient.

Source: EIO

Disclosure: The author works as analyst with the EIO.







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