Scientific Beta

The recent update of the EU Benchmark Regulation mandates the use of enterprise value rather than revenues as the denominator for the computation of carbon intensity. This article, published in the Spring 2021 issue of the Journal of Impact & ESG Investing, demonstrates that impact-concerned investors who wish to guide portfolio decarbonisation by carbon intensity should favor the use of revenues as denominator over that of enterprise value so as to encourage reductions in emissions and gains in process efficiency in the real economy.

The recent update of the EU Benchmark Regulation mandates the use of enterprise value rather than revenues as the denominator for the computation of carbon intensity. The regulator’s advisers justified the substitution by its detrimental impact on the coal industry and affirmed that enterprise value—like revenues—would be applicable to both equity and fixed-income indices. However, all companies with low enterprise value to sales have suffered from the change, and enterprise value cannot be computed in the absence of equity market capitalisation. Furthermore, enterprise value inherits equity market volatility, which weakens the link between changes in measured carbon intensity and underlying emissions and produces metric volatility that rewards an issuer’s market performance over its decarbonisation performance. Impact-concerned investors that wish to guide portfolio decarbonisation by carbon intensity should favor the use of revenues as denominator over that of enterprise value so as to encourage reductions in emissions and gains in process efficiency in the real economy.