The Climate Policy Initiative (CPI) has developed a methodology to evaluate companies based on their current and projected carbon emissions intensity over a period of three to five years. This framework is designed to complement traditional credit ratings, which have been criticised for not adequately factoring in climate risks when assessing creditworthiness.
CPI warns that relying solely on credit ratings without considering additional assessments on carbon emissions could deter investments in climate-positive projects and businesses, which often involve newer technologies and higher uncertainties compared to established, carbon-intensive industries.
The CPI also indicated that this framework could help service providers meet regulatory requirements, such as those from the Securities and Exchange Board of India (SEBI), which now mandates ESG rating products to include a green transition score for rated companies.
According to CPI, their proposed approach is more effective in evaluating a company’s future environmental impact than other transition-related metrics like temperature scores or climate value-at-risk measures. The think tank highlighted that temperature scores assume uniform action by all companies in the economy, while climate value-at-risk focuses on the financial impact of climate risks on companies, rather than how these companies contribute to climate change.
This new forward-looking carbon intensity metric could be especially useful in assessing the transition potential of hard-to-abate sectors, such as coal-fired energy, which has become a policy priority for Asian regulators and a financing opportunity for banks when considering phase-out or transition financing.
CPI’s carbon rating methodology would assess both projected and historical carbon intensity—measured per unit of projected future revenue—resulting in a numerical score on a 10-point scale. For instance, a company with the lowest emissions per unit of revenue compared to its peers would receive a carbon rating of CR1.
It is proposed that historical and current emissions could be weighted heavily, potentially around 70 percent, compared to projected emissions. Additionally, the weightings for future emissions intensity would be adjusted by year to reflect the time value of carbon, with earlier years receiving more weight.
However, CPI suggests that if the accuracy of emissions forecasting improves, the weighting for projected future emissions intensity could be increased. CPI also recommends that users of its methodology focus on Scope 1 and 2 emissions, given the data limitations for Scope 3.