Explaining carbon emissions
A portfolio’s carbon emissions total is calculated by adding together all the emissions for all the positions in the portfolio based on the investor’s ownership of enterprise value. Carbon emissions are however often displayed per million dollar of investment, which allows for comparisons with a benchmark, between multiple portfolios, and over time, regardless of portfolio size. Doing so allows us to represent the absolute carbon emission an investor is financing by investing $1m in the portfolio. By ‘financed’, we mean the ‘real world’ impact of every million invested.
The total figure is expressed in CO2e – or CO2 equivalent – terms. CO2e is a commonly used metric which helps standardise the measurement of GHG emissions beyond CO2, such as methane or nitrous oxide. These other gases can be expressed in terms of the amount of CO2 that would create the equivalent amount of warming. Combining measures of CO2 emissions with other GHG emissions allows for the use of a single number, the CO2 equivalent.
Emissions are categorised in three main ways: Scope 1, Scope 2 and Scope 3. The Greenhouse Gas Protocol, a body providing standardised frameworks to measure and manage GHG emissions from private and public sector operations and value chains, defines them as follows:
- Scope 1 → direct emissions from owned or controlled sources. Examples include fuel combustions and company-owned vehicles.
- Scope 2 → indirect emissions from the generation of purchased energy for a company’s own use.
- Scope 3 → all indirect emissions (not included in Scope 2) that occur in the company’s value chain, including both upstream and downstream (use of products) emissions. Examples include purchased goods and services, business travel, and waste disposal.
Explaining carbon intensity
The carbon intensity of a single company (or issuer) is the absolute carbon emissions of that company divided by a financial metric (for instance sales). It shows the carbon efficiency of a company in terms of its emissions per $M of sales. It is displayed in tons CO2e per $1M sales.
Calculating a portfolio’s carbon footprint
Measuring and publishing data on a portfolio’s GHG emissions gives individual investors an indication of their current financed emissions.
Lyxor has developed a proprietary methodology to calculate the carbon footprint of its portfolios. It relies on a database from MSCI which provides carbon and environmental metrics on emitters (companies and sovereigns). To ensure transparency, Lyxor has stated that main data on GHG emissions are based solely on scopes 1 & 2. Lyxor reports on all its funds, three carbon intensities when transparency is allowed:
- Carbon emissions financed (tons CO2 e / $M invested) represent the volume of GHG emissions (scope 1,2,3) for which the portfolio is responsible, in proportion to its ownership of enterprise value normalised by $M invested.
- Carbon intensity: the estimated volume of a company's direct (scope 1) and indirect (scope 2 only) GHG emissions, related to its total sales. It shows the carbon efficiency of a portfolio in terms of its emissions per $M of sales.
- Weighted Average Carbon Intensity: the exposure of the portfolio to intense carbon emitters on scopes 1 and 2. It is the average of the carbon intensity of companies held in a portfolio weighted by the exposure of that portfolio to each company. It thus helps inform investors how exposed a portfolio is to carbon-intensive companies.
These measures do not consider all emissions induced by the company, particularly those related to the use of products, or upstream by suppliers (scope 3).
