Glossary of terms
Carbon dioxide equivalent (CO2e)
Carbon dioxide equivalents - standardisation of all greenhouse gases to reflect the global warming potential relative to carbon dioxide. The analysis includes the six greenhouse gases covered by the UN Kyoto Protocol: Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulphur hexafluoride (SF6), hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs). Each gas has a global warming potential (GWP) measured as the ratio of heat trapped by one metric tonne of the gas to that of one tonne of CO2 over a specified time period. The emission of a GHG is multiplied by its GWP to calculate the equivalent level of CO2 emissions. For example, one tonne of SF6 equates to 23,900 tonnes of CO2. Conversions of greenhouse gases to CO2e are based on the GWP index published by the Intergovernmental Panel on Climate Change (IPCC), which assesses the effect of the emissions of different gases over a 100-year time period relative to the emission of an equal mass of CO2.
Carbon Disclosure Project
Carbon footprints of funds
Greenhouse gas emissions, measured in carbon dioxide equivalents (CO2e), are allocated from each constituent company to each fund in proportion to ownership. The carbon footprints of funds are calculated as metric tonnes of CO2e allocated to holdings per US$ million (or other currency) of revenue. The analysis covers direct and first-tier emissions from companies held.
Carbon intensity - measured as metric tonnes of greenhouse gases emitted relative to revenue - shows the extent to which a company depends on business activities and processes that emit GHGs. Trucost analyses carbon intensity by normalising direct operational emissions and indirect emissions from first-tier suppliers by revenue. All other suppy chain emissions are excluded to limit double-counting. The lower the carbon intensity, the lower the exposure to the rising costs of emitting carbon.
Trucost's data on corporate greenhouse gas emissions and financial performance can be used to assess potential exposure to carbon costs. A company can incur carbon costs directly through operations under government policies such as regulations, cap-and-trade programmes and taxation, or indirectly through higher input costs passed on by suppliers such as electricity providers. Most companies are more exposed to indirect carbon costs, so it is important to understand carbon efficiency in supply chains.
Other carbon risks can be driven by marketplace shifts in demand towards lower-carbon products, services and suppliers; reputational risk; and changes in the weighted average cost of capital, with a shift in premiums towards carbon-efficient companies.
Companies and funds that are relatively carbon-efficient may be less exposed to carbon costs, could be well positioned to provide a low-carbon value proposition, and stand to gain under carbon constraints.
Where a company has not disclosed adequate environmental data, Trucost derives information where possible from company reporting on environmental impacts in previous years; or from disclosures on resource use such as fuel consumption. Trucost uses emission factors to convert information on quantities of fuel use or electricity consumption to environmental metrics.
Direct environmental impacts result from a company's own operations. For example, a company that abstracts water from a river for use in industrial processes or as a cooling agent has a direct impact on the environment.
Trucost uses disclosure flags to identify the sources of quantitative data on corporate environmental impacts. Sources are categorised so that it is clear whether the data is based on Trucost calculations or company disclosures in Annual Reports and Accounts, Environmental Reports, Sustainability or Corporate Social Responsibility Reports, or on websites.
The flags also indicate whether Trucost had to adjust data. For instance, where a company only discloses data for part of its overall activities, Trucost may attempt to normalise quantities in order to calculate the likely environmental impacts of its entire operations. Trucost may also convert the data into standardised quantities of resources used or pollutants emitted using metric tonnes or cubic metres to allow for direct comparison across companies, industrial sectors and geographies. Data can also be standardised in line with international environmental reporting standards. E.g. Greenhouse gas emissions are quantified as metric tonnes in line with the Greenhouse Gas Protocol.
Environmental external costs
Trucost analyses environmental impacts in financial terms. When a firm uses a natural resource or emits a pollutant, the resulting damage to the environment or human health is usually borne by society rather than by the firm itself. These damage costs are not recorded on company's balance sheet and are therefore external environmental costs.
Quantities of resources used, pollutants emitted and waste generated due to business activities are multiplied by environmental external costs. Trucost has compiled a library of prices for over 700 different natural inputs and outputs. The prices in Trucost's database are based on a review of environmental economics literature. Valuations draw on extensive international academic research into the pricing of environmental externalities and are overseen by an independent international advisory panel of leading academics. A company's environmental external costs provide a long-term indicator of the environmental sustainability of its activities.
Pricing resources and pollutants in financial terms provides the most suitable weighting factor to identify the relative significance of a range of impacts. A company's environmental external costs can be compared with financial performance measures such as revenue (see Impact Ratio below).
Environmental impacts/key performance indicators
Environmental KPIs are quantifiable metrics that reflect the environmental performance of a business. Trucost measures over 700 environmental impacts and identifies which are most relevant to business activities in 464 sectors. Depending on the nature of operations, impacts can include greenhouse gas emissions; water abstraction; waste generation; Volatile Organic Compounds (VOCs); heavy metals such as mercury and lead; and other emissions such as nitrogen oxides (NOx), sulphur oxides (SOx) and particulate matter.
Businesses can measure environmental KPIs to identify significant areas to address; assess progress against targets to reduce impacts or improve resource efficiency; and monitor environmental performance against sector peers.
The Greenhouse Gas Protocol is led by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). The initiative developed the The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Corporate Standard), which was last revised in 2004. It categorises emissions in Scopes 1, 2 and 3 (see below). The GHG Protocol has built upon the Corporate Standard by developing additional guidance such as the Scope 3 Standard.
Global Warming Potential. Each greenhouse gas has a GWP measured as the ratio of heat trapped by one metric tonne of the gas to that of one tonne of CO2 over a specified time period.
The total environmental external costs of business activities (direct from operations and indirect from supply chains) divided by company revenue. This figure indicates how a company may be financially exposed to environmental costs under policy measures that implement the "polluter pays" principle. Impact ratios provide a useful metric to compare the overall environmental performance of companies, regardless of their sizes, sectors or geographies.
Indirect emissions from first-tier suppliers
Trucost measures direct greenhouse gases emitted from a company's operations, as well as upstream emissions that result from purchases of goods and services from direct (first-tier) suppliers. The most significant sources are typically purchased electricity (Scope 2 of the Greenhouse Gas Protocol) and employee business air travel (Scope 3 of the Greenhouse Gas Protocol).
Trucost's approach enables companies and investors to take account of emissions that are effectively outsourced. For a number of companies, indirect emissions from first-tier suppliers are greater than direct emissions.
All companies have environmental impacts through the goods and services that they purchase. Trucost is able to analyse the environmental impacts of a company's entire upstream supply chain. These supply chain or indirect impacts are often greater than a company's direct impacts, particularly for service-based companies. Measuring indirect impacts can be useful to assess "hot spots" in supply chains; potential exposure to rising environmental costs passed on in higher prices; and opportunities to improve overall environmental performance. Indirect impacts are calculated using Trucost's input-output model.
Life cycle analysis
Polluter pays principle
The principle that companies which cause environmental damage should bear the costs of reducing pollution and waste or compensate for the damage done to society (environmental external costs). The PPP underpins many environmental policy measures worldwide, and is implemented through regulations, standards and economic instruments. Measures such these increasingly require companies to contribute to abatement and damage costs.
Scope 1 emisisons
Emissions from sources owned or controlled by the reporting company, e.g. vehicles, blast furnaces, generators, refrigeration, air-conditioning units. Organisations must report on Scope 1 emissions to comply with the GHG Protocol corporate accounting standard.
Scope 2 emissions
Emissions resulting from consumption of electricity, heat or steam purchased by a reporting company. Organisations must report on Scope 2 emissions to comply with the GHG Protocol corporate accounting standard.
Scope 3 emissions
Scope 3 covers all other indirect emissions (excluding Scope 2). Scope 3 emissions are caused by business activities, but are released from sources not owned or controlled by the company. Examples of Scope 3 activities upstream in supply chains include business travel such as flights and car rentals; freight transport services; and the extraction and production of purchased materials. Scope 3 also includes emissions from sold products and services, as well as from investment portfolios. Scope 3 is an optional reporting category under the GHG Protocol corporate accounting standard.
The United Nations Principles for Responsible Investment provide a framework for investors to fulfil their fiduciary (or equivalent) duty to give appropriate consideration to environmental, social and corporate governance (ESG) issues that can affect the performance of investment portfolios. The principles are voluntary and provide possible actions for incorporating ESG issues into mainstream investment decision-making and ownership practices.