Carbon intensity is a way of measuring the amount (in tons) of CO2 emissions within the context of economic activity. This can be measured at various levels: for a country, GDP serves at the unit of economic activity (tons of CO2 per million dollars GDP); for businesses and industries, sales provides that gauge (tons of CO2 emissions per million dollars of sales). The metric allows us to standardize how we look at carbon intensity for companies of vastly different sizes, or in vastly different industries.
Carbon dioxide has been called the Earth’s “thermostat.”1 Across the past 800,000 years, periods of high and low concentrations of CO2 have corresponded, respectively, with spikes and drops in the planet’s temperature.2 A dramatic increase in CO2 began with the Industrial Revolution, and over the past several decades, such emissions surged from around 5 billion tons in the 1940s to more than 35 billion tons in recent years.3 And, despite global awareness and a rise in cleaner and renewable forms of energy, emissions continue to grow, jumping 1.5 percent in 2017, 2.1 percent in 2018, and 0.6 (projected) percent in 2019.4
Although CO2 is just one of several greenhouse gases (GHG) produced by human activity, it is by far the most prevalent – about 76 percent of total global GHG emissions.5 The vast majority of this CO2 is produced by burning fossil fuels for heat, energy, and transportation. Data demonstrate a constantly changing mix in the sources of emissions around the world. While North America and Europe started weaning themselves from coal, for example, the use of this fuel grew in both India and China.6 Additionally, the share of emissions from electricity and heat production grew significantly in recent decades, surpassing manufacturing industries and construction.7
Scientists point clearly to the long-term effects of global warming, including: melting ice sheets; rising oceans; increases in the frequency and length of heat waves and droughts; and a growth in the number and cost of extreme weather events.8 Models demonstrate the mounting severity of these effects if the global community fails to slow (much less halt) the rapid pace of global warming. Despite worldwide agreements – more than 190 countries initially signed onto the 2015 Paris Agreement9 – and highly publicized corporate initiatives to reduce GHG emissions,10 advocates have found progress to be frustratingly inadequate.
Companies often measure total GHG emissions, including CO2, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride, using three internationally recognized categories, or “scopes.”11
Scope 1 are direct emissions from sources that the organization owns or controls. These may include vehicle fleets, boilers, furnaces, or leaky air conditioning units.
Scope 2 emissions result from energy the organizations has purchased - imported heat for a building, electricity to run equipment, or steam to drive turbines. These represent one form of indirect emissions. (Such emissions are reported as Scope 1 emissions when generated - for example, at a power plant - but Scope 2 by the organization purchasing and consuming the electricity, a dual-reporting system that depends, in part, on the methodologies used.12 )
Scope 3 emissions, another indirect form, result from the organization’s activities, but not from equipment or services it controls. These might include employees’ commutes or business travel, or the transportation of products.
Dozens of countries mandate emissions reporting from companies or facilities of certain sizes or scales. The U.S. Greenhouse Gas Reporting Program, for example, requires data from large emitters, fuel and industrial gas suppliers, and others who fall into 41 specific categories. Emissions covered by this regulation represent about 50 percent of the total GHG emissions in the U.S.13
In recent years, an increasing number of companies are measuring and reporting their emissions data voluntarily. But where and how this information appears is not always consistent. Some companies tuck climate-related data into financial filings; others produce full sustainability reports. Companies can choose from a handful of different international reporting frameworks to disclose climate-related data, risks, and strategies. The result is a hodge-podge of information that savvy investors must sort through.
But the trends are moving strongly toward clear and transparent reporting. A recent Thompson Reuters review of the 250 companies responsible for about a third of GHG emissions caused by human activity found that in 2017, about 90 percent provided some emissions reporting and just over half provided a full accounting of their emissions – a number that more than tripled since 2011. Moreover, the report also found that companies providing more transparency than their sector competitors tended to outperform peers in shareholder return.14
Knowing that carbon emissions are at the core of climate change, and CO2 is the largest source of those emissions, One Day In July will use carbon intensity as one screen in our environmentally focused investment solutions.
As we evaluate potential environmental investments, we supplement our traditional criteria of cost, diversification and liquidity with an analysis of a fund’s exposure to companies that are heavy carbon emitters. We seek to utilize funds that have either no exposure to these companies or much smaller exposure relative to a traditional index fund.