Measuring Corporate Carbon Performance

September 17, 2009
This is a guest contribution by Drs. Timo Busch and Volker Hoffman, Professors at ETH Zurich, Group for Sustainability and Technology. It’s based on their recent article Corporate Carbon Performance Indicators in the Journal of Industrial Ecology. It moves toward a clear and operational definition of carbon intensity, dependency, exposure, and risk.

The world faces twin energy-related threats: not having adequate and secure supplies of energy at affordable prices, and the environmental harm caused by consuming too much of it. Companies are central to paving the way towards a low-carbon society because a large portion of carbon inputs and GHG emissions stems from industrial production. As a consequence, stakeholders increasingly require companies to disclose their strategies for addressing climate change. In particular, actors in financial markets are investigating the implications of climate change on the competitive position of companies and on risks to shareholder value. However, business responses to climate and carbon issues have been characterized as ambiguous, and external assessments of corporate efforts have been contradictory, even when analyzing the same firms. Furthermore, for many companies, emissions from their own operations are dwarfed by emissions that occur upstream or downstream in the value chain, e.g. those connected to energy provision or product usage, which are often not covered in voluntary GHG emission reports.

The literature on Industrial Ecology has termed this perspective ‘life cycle thinking’ of material and energy flows. In order to increase the reliability of life cycle-wide carbon assessments and to determine performance differences between companies, indicators are required that concisely measure a company’s performance with respect to carbon. These indicators can be used for analysis and reporting purposes, which aim to increase the transparency of corporate carbon performance assessments.

However, the key question: How to construct comprehensive and systematic carbon performance indicators? In a paper published in the Journal of Industrial Ecology we suggest an answer to this question. We distinguish between two dimensions: on one axis, whether an indicator measures a firm’s physical carbon flow performance or the monetary value of these flows; on the other axis, whether an indicator assesses the carbon performance in a static of dynamic manner. This two-by-two matrix gives four distinct indicators.

Busch Hoffman 2by2

The first indicator, carbon intensity, relates to a company’s physical carbon performance in a static manner. It describes the extent to which a company’s business activities are based on carbon usage for a defined scope and year. A firm’s carbon intensity is measured by the ratio between a company’s carbon usage in absolute terms (e.g., the total greenhouse gas emissions of the fiscal year 2005) and a related business metric (e.g., the sales of the same year).

The second indicator, carbon dependency, describes the change in a company’s physical carbon intensity over time – as such this indicator displays a dynamic component. For this purpose, certain steps need to be undertaken: first, a time period has to be determined. Second, the future carbon intensity has to be estimated, for example, based on specific scenarios and models (e.g., the total greenhouse gas emissions and the sales in 2015). Third, a specific carbon intensity (e.g., 2005) is put into relation to a future one (e.g., 2015). Based on this information, the carbon dependency describes the degree to which a company is able to reduce its carbon intensity over time (e.g., between 2005 and 2015). As result, a highly carbon dependent company has difficulty reducing its carbon intensity over a given time period.

The third indicator, carbon exposure, brings the monetary dimension into the picture. For this purpose, the prices for a firm’s carbon inputs (i.e., fossil fuels) as well carbon outputs (i.e., for greenhouse gas emissions, if emission trading schemes or taxation exist) are taken into account. Like the carbon intensity indicator, the carbon exposure assesses the static performance; it, therefore, determines the monetary implications of the business activities due to carbon usage for a defined scope and fiscal year (e.g., 2005). Through the use of prices (for the same year), the carbon inputs and outputs can be combined in one monetary figure. The result describes how much carbon matters for a firm from a cost point of view.

The fourth indicator, carbon risk, describes the change in a company’s monetary carbon performance within a given time period. Similar to the carbon dependency indicator, a firm’s carbon risk measures the relative performance change from the status quo to a future carbon exposure. In order to obtain this future carbon exposure, the results of the estimated carbon dependency can be utilized, complemented by forecasts regarding future price conditions for fossil fuels and carbon emissions (as, e.g., provided by EIA reports).  With these estimates, the risk feature of the indicator becomes vivid: especially when taking into account a future price for greenhouse gas emissions (e.g., $30 per ton of CO2) that are likely under a future international climate regime or national climate policies and the potential increase of fossil fuel prices (due to increasing resource scarcity), the real monetary risks lurking behind carbon become transparent. The indicator does not address potential risks (or opportunities) associated with new technologies or loss of market share for carbon intense products; it reflects increasing costs incurred by a company in paying for fuels and credits.

These indicators shed light on the physical and monetary dimensions of a company’s current and future activities with respect to carbon inputs and outputs. Based on this kind of information stakeholders are enabled to assess a company’s stake in climate change and its efforts towards better managing carbon usage: policy makers can use such information to formulate and evaluate policies, while financial markets obtain insights regarding the performance of companies with respect to carbon and corresponding financial effects. Furthermore, companies themselves can use the indicators for benchmarking purposes with competitions as well as with respect to own performance improvements over time.

The full paper is available here and the citation is: Hoffmann, V.H., Busch, T. (2008): Corporate Carbon Performance Indicators: Carbon Intensity, Dependency, Exposure, and Risk. Journal of Industrial Ecology 12 (4), 505-520.

One Response to “Measuring Corporate Carbon Performance”

  1. VERY interesting matrix, which clarifies my thinking on corp carbon performance. Particularly, the distinction between carbon exposure and carbon risk. I wish I’d seen this BEFORE doing research and helping draft the “Climate Risk” chapter in the new “Environmental Alpha” book due out any day now!
    Bill Baue, Executive Director, Sea Change Media
    Communications Professor, Marlboro MBA in Managing for Sustainability
    twitter: @bbaue and/or @cchange