Scientific Beta

Dramatic, across-the-board progress in the carbon efficiency of human activities is needed to stem global warming. Normalising the greenhouse gas emissions of a process by the market value of its output appears natural for comparisons across activities and has gained wide acceptance for investment analysis and portfolio reporting. However, the European Benchmark Regulation has recently mandated the use of enterprise value for normalisation. Partial recognition of data issues and biases plaguing enterprise value led the regulator to reintegrate cash in its definition and adopt an alternative metric for private companies – the latter introducing consistency and transparency issues across benchmarks.

Dramatic, across-the-board progress in the carbon efficiency of human activities is needed to stem global warming. Normalising the greenhouse gas emissions of a process by the market value of its output appears natural for comparisons across activities and has gained wide acceptance for investment analysis and portfolio reporting. However, the European Benchmark Regulation has recently mandated the use of enterprise value for normalisation.

It was represented that the shift from market value of product to market valuation of the producer would be detrimental to the coal industry and that enterprise value – like revenues – would be applicable to both equity and fixed income indices. However, all companies with low enterprise value to sales suffer from the shift and enterprise value cannot be computed in the absence of equity market capitalisation.

Partial recognition of data issues and biases plaguing enterprise value led the regulator to reintegrate cash in its definition and adopt an alternative metric for private companies – the latter introducing consistency and transparency issues across benchmarks.

Reliance on volatile valuation data dramatically reduces the association between changes in measured intensity and underlying emissions. Reliance on revenues is preferable if reductions in emissions and gains in process efficiency are to be encouraged.