A popular method for tracking a business’ carbon footprint over time creates the illusion of increased efficiency during periods of high inflation, warns Sudhir Roc-Sennett, head of environmental, social and governance at Vontobel Asset Management Inc.

“The most consistent way [of analyzing an organizations’ carbon footprint] is looking at tons-per-sales units, usually the tons of greenhouse gases emitted for each US$1 million of sales made by a company. Unlike other approaches, it doesn’t matter what sector you’re in or if you’re growing or shrinking. By using sales as a common measure it makes the numbers comparable. It’s convenient, but it’s got the potential to cause great distortions.”

The approach may lead both institutional investors and corporate leaders to overestimate the progress being made to reduce a company’s carbon footprint in periods of high inflation, says Roc-Sennett, noting sales per tonne of carbon emissions appear to grow as currencies fall.

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“The reason this matters is that it could push policy changes down the road on the route to reaching net-zero emissions. . . . If you blindly accept a 15 per cent compliment to carbon emissions figures, it could mean forgoing two years of progress on the path to net-zero emissions. It’s the route that matters — if that gets pushed back, it means your glide path will start bulging. Investors want it to be as straight as possible.”

To eliminate this illusion of progress, the carbon intensity model could simply adjust data from past years to undo the effect of inflation, says Roc-Sennett, noting inflation lifts the sales part of the measure without any accompanying change in tons of emissions. However, he cautions it can be difficult for investors to adjust their existing approach.

“The problem with altering methods for measuring ESG issues is that particular approaches get embedded in companies and at institutional investment organizations. Investors, marketing teams and legal teams need to sign off on any changes.”

Other approaches are frequently used within particular industries, with Roc-Sennett particularly keen on an approach seen in the locomotive sector. Known as the railroad model, it measures the emissions released by moving a ton of freight one mile. “There are variations of this approach used in other industries, too. Airlines often measure emissions-per-passenger mile and a courier like [United Parcel Service] uses emissions per package delivered. Alternatively, you can simply track gross emissions, but that’s more challenging when trying to forecast a growing business over the next 30 years.”

The biggest barrier to moving toward an alternative model may come from institutional investors themselves. “A lot of companies will give both of those figures,” he says. “But it’s our industry that normalizes the sales-based measurement. Asset managers like to normalize things, but what really matters is the rate of reduction in the actual tons.”

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