Table of Contents

I. Introduction

II. Research

III. Budgets and Industry Breakdown

IV. Calculations

V. Application to Your Portfolio

VI. Disclaimer


I. Introduction

The YvesBlue Carbon Audit visually demonstrates how a portfolio manager's sector allocation decisions relate to the amount of carbon remaining in the global carbon budget each year.

YvesBlue coverage of ~50,000 + public equity companies represents about half of the total carbon budget as stated by the latest IPCC report. The remaining amount of carbon that can be emitted to the atmosphere to stay under 1.5° warming is ~420 Gigatons* through 2026, declining at ~33%. The Science Based Targets Initiative (SBTI) provides us with a roadmap for allocating the remaining budget to the industry 61 classifications covered in YvesBlue and for the schedule of year-over-year reductions that are necessary to stay under the 1.5° limit.

II. Research

The Global Budget

According to the Intergovernmental Panel on Climate Change (IPCC) SR15 Report, the remaining amount of carbon that can be emitted to the atmosphere to stay under 1.5° warming is ~420 Gigatons* through 2026, declining at a rate of ~33%. This means that sectors and the companies in them will have an incrementally tighter restriction on emissions year over year. A steep drop in carbon will be needed by 2030, and then by 2050, all carbon emissions will hopefully converge at zero.

Sector Budgets

YvesBlue surveyed several different providers of climate modeling, such as the One Earth Climate Model, the open-source Global Carbon Budget 2021 v.0.6., and the Science Based Targets Initiative's (SBTi) Pathway to Net Zero 2021. This last model was an update to their 2019 Sector Decarbonization Approach based on the International Energy Agency's bottom-up apportionment to heavy industry, as it was relatively well known.

In aggregate, 1.5ºC-aligned pathways used by the SBTi stay within a 500 GT carbon budget and reach net-zero CO2 at the global level by 2050, under the assumption of at least 1-4 GT CO2 removal per year by 2050. For YvesBlue modeling, the budget levels are pegged to the aggregate emissions of the companies in our database of +/- 50,000 companies that represent combined, reported, and modeled data. The carbon report will indicate the number of modeled vs. reported data in any module in all of its analyses.

Our coverage of companies continues to expand, but as of February 2022, the aggregate carbon of the YvesBlue Coverage Database is roughly half of the SBTi GT carbon budget based on reported, backfilled, and imputed company levels. Based on published studies and expert judgment, the SBTi cross-sector emissions cover CO2, CH4, and N2O emissions from energy supply, buildings, industry, and transport.

Between 2020 and 2050, the energy and industrial processes CO2 emissions corridor results in cumulative CO2 emissions of 450-480 GT CO2. The remaining portion is attributable to forestry, land, and agriculture (FLAG) sectors and in specific cases of bioenergy use. They are working on separate budgets for those sectors with the companies involved.

Based on the SBTi's Pathways to Net Zero Technical Summary Report, the levels in a million metric tons of carbon dioxide are shown below. This also provides the schedule of year-to-year reductions for us to follow.

III. Budgets and Industry Breakdown

Table: 2020-2050 CO2 emissions budgets used by the SBTi for the energy supply, transportation, industry, and buildings sectors. Budgets cover direct emissions only (i.e., scope 1), but when setting SBTs, companies must set targets that also cover indirect emissions (i.e., scopes 2 and 3). Due to expected mitigation trade-offs across sectors, the lower bound of "Total" CO2 emissions is higher than aggregating all sectors' lower bound. 2019 CO2 emissions data are sourced from IEA (2021). Sector-specific pathways in-line with the budget ranges in this table do not automatically qualify for use by the SBTi.

1. YB must distribute these levels among 61 industry classifications used in the YB application.

  • The 2021 SBTi model only lays out the expected budgets for heavy industries for direct emissions, specifying only Scope 1.

  • YB includes Scope 2 and 3 into these allocations.

2. Refinitiv provides YB carbon data.

  • The greatest amount of reporting usually exists in the previous year.

  • YB either takes data from the previous five years (backfill) or uses an estimation methodology for companies that do not have data.

The YvesBlue coverage set of aggregate emissions is shown as a subset of the Global Carbon Budget and is pictured below; the carbon budget work follows the second diagram's workflow from 2020-to 2050.

The SBTi first applies the sector reduction schedules at the Meta level. We then break this down to 61 TRBC industry groups and each company within each industry group based on emissions intensity.

IV. Calculations

Industry Group intensity reduction targets

group_intensity_reduction_targets_v5.9

Additional carbon totals and % change in revenues in the TRBC_industrygroup reduction sheet of sector_carbon_totals_SBTI2021_v5.9

SBTi Pathways to Net Zero https://sciencebasedtargets.org/resources/files/Pathway-to-Net-Zero.pdf

V. Application to Your Portfolio

Ownership Ratio

A portfolio manager does not own all of a company's annual emissions. Instead, the portfolio owns a small percent of the company's enterprise value which drives the ownership ratio. This tells us what portion of total annual emissions to assign to the portfolio for each company.

The holdings are categorized by the TRBC Industry Group and added up by portfolio weight.

At the industry level, users see whether the allocation strategy includes sectors that exceed their annual budget in the most recent reporting year based on total Scope 1 emissions (toggle to include Scope 2 and 3).

At the company level, users see the budget status of each holding.

VI. Disclaimer

The YB approach is one way to convert the IPCC findings into visual analytics to provide a sense of positioning and timing for portfolios and companies. These tools will be continually updated and improved over time as we interact with system users, outside advisors, and entities. YB audit and projections are not a technical workup as would be done by companies themselves, and YB is not the first to deliver such analytics.

However, these modules are essential for YB. They will eventually be encompassed into an overall YB Impact Score and will be a key aspect of an extended suite of carbon analytics. This draws upon the annual carbon emissions limits based on bottom-up analysis done by the Science Based Targets Initiative in 2021 (SBTi). We continually monitor developments by - The International Panel on Climate Change (IPCC) to guide the development of carbon allocation to individual industries.

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