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Say hello to Acme Steel Inc.
They’re a 6,000 person company, based in Australia.
Acme is used throughout as a worked example.
Say hello to Acme Steel Inc.
They’re a 6,000 person company, based in Australia.
Acme is used throughout as a worked example.
Implied temperature alignment evaluates a holding’s emissions against established global temperature scenarios ranging between 1.5ºC to 4ºC. Emmi's method compares a company or portfolio's emissions to their fair-share of global emissions throughout the various temperature scenarios.
This is calculated using 5 equally weighted economic factors including Enterprise Value, Earnings, Total Assets, Net Assets and Market Capitalisation - that represent the economic activity of the company relative to the rest of the world's economy.
Temperature Alignment
Acme Steel Inc has an enterprise market value including cash (EVIC) of $1.5billion, market capitalisation of $8.3billion, Total Assets of $9.9billion, Net Assets of $-3.7billion and Earnings of $1.6billion. The worlds industrial economic activity is ~2550 bigger than Acme Steel, based on the same 5 metrics at global scale. With Acme’s emissions estimate of 24.4million tonnes, an Earth-scale Acme’s emissions would be 62 billion tonnes.
The budget to be aligned with a 1.5degC in 2023 world is 28 billion tonnes, 35 billion tonnes for 2degC and 40 billion tonnes for 4degC. That makes Acme steel over 4degC aligned since it’s producing 62billion global equivalent tonnes - much higher than the 4degC scenario.
Reduction Requirements
We calculate a company’s requirements to reduce carbon emissions by assessing key company financial metrics against carbon emissions, and compare that to key global economic metrics (such as GDP, global wealth and global debt) against global carbon budgets specified in the IPCC 1.5º, 2.0º and 4.0º scenarios.
We process each of our five economic factors of the asset, weighing them against carbon emissions to assess how they compare to a global carbon budget.
Our five factors are:
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Earnings
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Assets
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Market Cap
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EVIC
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Net Assets
1️⃣ We look at the scaling of that factor for Acme vs. the Global metric (e.g. GDP for Earnings) to figure out a multiplier.
2️⃣ We scale up Acme’s emissions based on the multiplier of the factor, as if Acme was the economy. We now have earth-scale Acme emissions, as determined by that economic factor.
3️⃣ We look at how Acme’s earth-scale emissions measure up against IPCC 1.5º, 2.0º and 4.0º C scenario global carbon budgets, to understand their emissions reductions requirements as a % of the global carbon budget.
4️⃣ We finally scale down the earth-scale carbon budget overspend to get Acme’s actual reduction requirements, based on that factor.
Each factor results in a slightly different reduction requirement, which are then combined with equal weighting to create a single number. We use this to indicate tonnes of C02 that needs to be reduced by this specific company, to be aligned with the IPCC 1.5º, 2.0º or 4.0º scenario.
Each different factor will consider a nuanced part of the asset, for example an asset’s value is not just determined by the level of revenue it generates but also the size of its underlying assets and liabilities. Measuring these factors together indicates their economic value, as part of assessing a reasonable carbon budget it should be allocated.
For our example, Acmes Scope 1 carbon emissions to earnings is $1,163 per tonne of carbon. The global benchmark for a 1.5°C scenario is $3,571. Since Acme's rate is lower, they need to increase the amount of earnings per ton to align with a 1.5ºC scenario, which requires reducing their emissions by 67%. We calculate those requirements and allowances across 5 economic factors across Scope 1, 2 & 3 to gain a comprehensive understanding of the company's reduction requirements.
When considering reduction requirements for temperature alignment, we assess across all 3 scopes at once - being under-budget in Scope 1 means it is possible that Scope 3 can be a little bit over-budget and still be aligned to a certain temperature scenario. This makes these reduction requirements more scientifically accurate.
This section is a part of both Temperature Alignment and Potential Carbon Liability. If you have already read it, feel free to skip past.
