Carbon Diagnostics Methodology

Financed emissions represent the 'owned' emissions that result from investing in a security or fund. Emissions are calculated for Scopes 1, 2 and 3, and then aggregated for total financed emissions. 

 

Emmi uses machine learning models that are trained using reported emissions from public companies to calculate the emission for any asset, based on financial metrics. 

 

We can then aggregate attributable emissions to a portfolio level, based on the asset weightings

Temperature alignment captures what temperature the company or fund is currently aligned with, based on its carbon footprint.

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We determine temperature alignment by scaling down the global carbon budget for the IPCC 1.5ºC, 2ºC and 4ºC scenarios to company size, based on the economic value of that company. We calculate the economic value using five economic value metrics to create a comprehensive understanding of the asset.

 

We then plot the company emissions against the company-scale carbon budget to place the asset on the spectrum from 1.5ºC to 4ºC.

The percentage decrease in emissions required to avoid any economic downside from carbon constraints and carbon pricing under a given climate scenario (i.e. global carbon budget and global carbon price).

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This is a weighted combination of the carbon budget that would be allocated to that company (constructed using 5 economic factors) and the financial resilience of the company if carbon constraints and a carbon price were introduced (constructed with 7 economic factors). 

Potential carbon liability (PCL) represents the financial implications of the company’s transition risk in company value erosion terms, calculated by applying a carbon price to the company’s carbon emissions threshold overrun.

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For emissions in excess of the carbon emissions threshold for each given year (i.e. the amount a company needs reduce its emissions by), we apply the carbon price associated with the relevant climate scenario (this will change for 1.5, 2 and 4 degree climate scenarios).

 

This metric is akin to maximum downside loss, and represents Emmi’s Value at Risk metric.

Scenario analysis takes inputs of company carbon emissions, and global climate scenario parameters (price and carbon budget across years) to assess the financial outcomes of a company or asset. 

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Each scenario analysis creates new data points for Reduction Requirements and PCL based on the specifics of the scenario. 

 

Climate scenarios are typically published by international bodies like the IPCC and the NGFS.

 

They examine potential future impacts based on different emissions pathways or temperature outcomes. Each scenario has, among many other data points, a global carbon budget and projected carbon prices.