How to consider the carbon intensity of companies?


The world of CO2 accounting revolves around the Greenhouse Gas Protocol. Scope 1 emissions cover all of a company’s direct carbon emissions, for example, the fuel combusted at a company’s facilities. Scope 2 emissions are broader, covering some less direct emissions, including the heat and electricity bought by a company. Finally, scope 3 emissions address all the CO2 indirectly emitted through the use of a company’s products.

Much of the publicly available data is captured by scope 1,2 and 3 emissions. Whilst such a framework does much to provide a starting point, unfortunately carbon accounting is more complicated than this.

" Important emissions categories are completely overlooked by scope 1,2 and 3 – perhaps as much as 2/3’s – relate to the purchase of raw materials, rather than the fuel consumed. "

- ARIA Capital Management -

Carbon accounting is currently rooted in Scope 1,2 and 3 Emissions

Source: Greenly


Carbon Case Studies:

For example, let’s consider the case of Uber versus an airline. Transportation companies of course report within their Scope 1 emissions the carbon costs of moving people around – yet Uber and their drivers don’t. Lest we forget that there are similarities between carbon and financial accounting rules. A large oil major will be a minority shareholder in hundreds of facilities and assets globally. However, because they neither own in majority or operate those assets, the carbon emissions are also not consolidated in their numbers – whilst the financial rewards may accrue in an accounting sense, their carbon cost of doing so doesn’t.

As a rule of thumb, the smaller the business in question, the less ability they will have to provide accurate assessments of their emissions profile. Moreover, important emissions categories are completely overlooked by scope 1,2 and 3. For example, a significant amount of CO2 emissions – perhaps as much as 2/3’s – relate to the purchase of raw materials, rather than the fuel consumed.

Consider Apple and all of the mining of rare earths and plastic consumed within a MacBook – yet that aspect of the company’s supply chain falls outside of the scope of work.

Another shortfall is the destruction of any natural environment by virtue of a company’s direct or indirect activities – yet that is not considered with Scope 1,2 or 3 emissions.

There can be significant differences within an industry. Consider the refining industry – some firms may be leaders in the sense they are producing clean fuels, others may be producing petrochemicals. Whilst an absolute Scope 1,2 and/or 3 number’, may be possible to calculate it may be quite misleading as the former company is ultimately providing a solution to a more sustainable world, whereas the other may be a laggard in that sense.

That’s not to say that such a carbon accounting approach should be wholesalely discarded – in certain circumstances, for example when considering a steel producer, with a single asset blast furnace, scope 1,2 and 3 emissions are very relevant. Care must be taken though in an unfiltered interpretation which doesn’t take into account the sector, or all of its value chain.


A supply chain based approach

One means of improving the relevance of emissions profiling could be to adopt a modular approach. It is the processes a company engaged in which emit, not the corporate entity itself. For example, a standardised, generally accepted calculation for the sourcing, extraction, refining and transport of the minerals needed to build an iphone or make an EV could be established at sector level. From there, such a calculation can be ‘pro rated’ to a given company relative to its size and production processes.

From their the CO2 intensity of an Apple iWatch user could be calculated, and a modular supply chain using building block calculations can be assembled.

Moreover, there are certain activities that can be considered ‘carbon negative’. That is to say the process undertaken leads to a removel of CO2 from the atmosphere, which without that process would not have occurred. A good example might be a seaweed cultivation project. An acre of seaweed results in 2 net tons of CO2 equivalent sequestered deep into an ocean each year, which would not occur without that project.


A per unit approach

Another consideration is the means by which we can draw comparisons between the relative carbon intensities of two different entities. Evidently, relying on absolute numbers is less than satisfactory- an appropriate common denominator needs to be identified. That being the case, it would be possible to more accurately compare two companies in a given sector – be they software companies or manufacturing businesses.

A baseline comparator needs to be identified to understand the relativity of different choices. For example, airline transportation, accounting for 3% of global emissions, is an oft targeted sector. However, decarbonising aviation fuels can be achieved by a number of processes, those in their own right have differing degrees of carbon intensity.


The relative intensity of decarbonising aviation fuel


Source: Academic Studies, TSE, Rob West


Where possible then, analysis should start with identifying an asset or process list of a given enterprise, so that a modular calculation of carbon intensity can be interred, rather than relying on blanket company level disclosures. Carbon accounting frameworks will develop over time, and we believe will ultimately converge upon a building block approach which will consider the entire value chain, rather than a point in time estimate of a company’s more readily measured emissions.

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