A Novel Approach of Measuring Portfolio Carbon Emission Intensity to Rank, Score and Take Investment Decision

Abstract

A range of carbon emission metrics are available for investors for the purpose of measuring carbon risk management, reporting and to take proper investment decisions. As industry frameworks continue to evolve, investors are moving from revenue-based carbon intensity metrics towards metrics based on enterprise value including cash (EVIC). This shift has some important implications and can move in opposite directions in identical scenarios. Since the distribution of a firm’s carbon intensity is very skewed, the exclusion of a small fraction of highly polluting firms can massively reduce the carbon footprint of a portfolio and can mislead the investors in taking proper investment decisions. To address such misreporting/false reporting, this study proposes a new carbon intensity metric which will be useful to investors in assessing, ranking and scoring the portfolios so that they can take proper investment decisions.