These four indicators will help your business measure greenhouse gases across the value chain.
Business response to climate change has been difficult to evaluate, partly because emissions across the value chain are not easily measured. Currently, GHGs are measured using the Climate Footprint Calculator, the Global Reporting Initiative (GRI), and resources from the World Business Council for Sustainable Development and the World Resources Institute. Yet, none of these offer a consistent set of indicators that includes carbon inputs and outputs from both direct and indirect business activities.
Researchers Volker H. Hoffmann, and Timo Busch present an approach to standardize the assessment of a company’s carbon performance indicators in their paper, “Corporate Carbon Performance Indicators: Carbon Intensity, Dependency, Exposure and Risk.“
Managers can apply a standardized approach to evaluate their company’s carbon performance. The approach builds on four corporate carbon performance measures that describe both the physical effects (i.e. carbon intensity and dependency) and the financial impact (i.e. carbon exposure and risk) of carbon flow in the present and the future.
4 Indicators to Evaluate a Company’s Carbon Performance
Physical indicators (intensity and dependency) help identify the steps in the value chain where companies can reduce their GHG emissions. Financial indicators (exposure and risk) reveal the carbon costs and risks underlying a company’s business activities.
Carbon Intensity: Relates carbon usage to business performance. Calculated as the firm’s carbon usage for the year divided by a financial metric (e.g. sales) for the same time period.
Carbon Dependency: The change in a company’s use of carbon (intensity) over a given time period, expressed as a percentage.
Carbon Exposure: Financial implications of carbon use for a given time period. Relates a company’s carbon costs to another financial metric (e.g. sales).
Carbon Risk: The change in monetary carbon performance over a given time period, expressed as a percentage.
Implications for Managers, Financial Analysts, and Policy Makers
Managers can use the proposed approach to assess their carbon-reducing strategies and efforts. They should adopt a consistent approach to measuring and reporting carbon inputs and outputs to provide a more complete perspective on their company’s carbon use. This approach includes a broader scope of upstream and downstream effects, allowing managers to identify underlying carbon costs throughout their business activities.
Financial analysts and policy makers can also apply this framework to evaluate investment strategies and government policies. Financial analysts can use physical indicators to evaluate management’s effectiveness, while financial indicators can help analysts optimize portfolios and determine risk premiums. Policy makers can use physical indicators to identify targets for carbon reduction policies across the value chain.
Implications for Researchers
Busch and Volker offer a conceptual analysis of carbon performance indicators after reviewing existing indicators and metrics. They define four performance indicators and highlight their implementation through two examples. The authors focus on scope 1-2 carbon usage, which includes direct carbon inputs-outputs for a firm as well as carbon usage from purchased energy. They note that LCA is still a more appropriate measure of product life-cycle-wide impacts.
The researchers propose extending current frameworks, i.e. GRI and the Carbon Disclosure Project, to include indirect impacts. Future research should facilitate measurement of scope 1-3 carbon usage to incorporate impacts across the supply chain; but, an improved understanding of industry-specific conventions would first be required.
Hoffmann, Volker H., & Busch, Timo. (2008). Corporate Carbon Performance Indicators: Carbon Intensity, Dependency, Exposure and Risk. Journal of Industrial Ecology. 12(4), 505-520.