Overallocation and correction of carbon emissions in the evaluation of carbon footprint

Abstract

This paper points to several carbon footprint data distortions that overallocate carbon footprints to individual companies, and to several carbon data intricacies that lead to improved data integrity. Data distortion due to the same company being listed in multiple geographical jurisdictions or through different share classes overstates Emissions Scope 1 by 4.6%, Emissions Scope 2 by 5.5%, Emissions Scope 3 by 10.6% and Reserves by 6.0%. Data distortion due to index construction by having different market capitalization in representative indices overallocates Emissions Scope 1 by 33.9%, Emissions Scope 2 by 27.6%, Emissions Scope 3 by 21.3% and Reserves by 57.2%. A significant amount of carbon data is not precise but is estimated by third-party providers through proprietary techniques. The estimated data for Scope 1 Emissions is 46.4% for the companies in the index. In addition, carbon data is stale, resulting in 94.5% of data being two years old or more. Usage of carbon data in a present format may incorrectly remove some companies from portfolios (negative screen, complete removal) or incorrectly reduce some companies’ weight in a portfolio (partial screen, fractional removal).