When investing in a company via investment funds (fixed income or equities) you will have the possibility to choose a certain fund, depending on its CO2e emissions, in the future. You will have the possibility to redirect your investment to those funds or activities with lower CO2e or combating CO2. The Asset Managers/Banks will provide you with respective information and in your deposit statement the CO2e of your funds may be shown. The questions is, if you (as investor) are responsible for the Co2e-emissions of a company (i.e. for the Co2e according to your investment share).

Who is responsible for the Co2 emissions?

According to all reporting standards the company itself or the management of a company is responsible for the management of Co2 emissions. The responsibilities are:

  • Responsible for the management of non-financial key figures
  • Responsible e.g. for the level of Co2 emissions and other operational non-financial indicators (e.g. women’s quota)
  • Responsible for calculating Scope 1, 2 and 3 emissions
  • Responsible for the publication of non-financial data in annual reports, sustainability reports and management reports (non-financial statement)

But even if the company is responsible for its Co2 Emissions, the European green deal, sustainable finance and MifID regulations would like to put some pressure on the companies in the way that investors shall redirect funds to those companies that tackle the CO2 topic best. The intention is that those companies should get more funds the “greener” they are.

This being the reason why the Co2 emissions of an investment share will likely be additionally shown in the deposit statement in the future. It shows an investor what Co2 emissions he is backing with the money he invested in a company (i.e. the investors Co2 emissions).

How is the calculation being done?

The Enterprise Value is the denominator for calculation the CO2e share of Investment funds, as sustainable investing is being done in fixed income as in equities. The possibility for investment funds to invest in equity and debt has some important implications for the calculation of the Co2e share to report.

In the final Report on draft Regulatory Technical Standards (RTS) with regard to the content, methodologies and presentation of disclosures pursuant to Article 2a(3), Article 4(6) and (7), Article 8(3), Article 9(5), Article 10(2) and Article 11(4) of Regulation (EU) 2019/2088 the European Supervisory Authorities (ESAs) have developed through the Joint Committee (JC) draft Regulatory Technical Standards (RTS) with regard to the content, methodologies and presentation of sustainability-related disclosures (Sustainable Finance regulations).

In the Annex I of this final Report it is shown how an investment fund shall calculate his share of GHG Emissions:

“‘enterprise value’ means the sum, at fiscal year-end, of the market capitalisation of ordinary shares, the market capitalisation of preferred shares, and the book value of total debt and non-controlling interests, without the deduction of cash or cash equivalents;

(4) ‘current value of investment’ means the value in EUR of the investment by the financial market participant in the investee company;

(5) ‘current value of all investments’ means the value in EUR of all investments by the financial market participant;

(6) ‘GHG emissions’ shall be calculated in accordance with the following formula:

(𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 /  𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦′𝑠 𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒)

×

𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦𝑠 𝑆𝑐𝑜𝑝𝑒(𝑥) 𝐺𝐻𝐺 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠

(7) ‘carbon footprint’ shall be calculated in accordance with the following formula:

((𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 / 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦𝑠 𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒)

×

(𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦𝑠 𝑆𝑐𝑜𝑝𝑒 1,2 𝑎𝑛𝑑 3 𝐺𝐻𝐺 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠))

/

 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 (€𝑀)

(8) ‘weighted average’ means a ratio of the weight of the investment by the financial market participant in an investee company in relation to all investments of the financial market participant;

(9) ‘GHG intensity of investee companies’ shall be calculated in accordance with the following formula:

(𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 (€𝑀))

×

(𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦𝑠 𝑆𝑐𝑜𝑝𝑒 1,2 𝑎𝑛𝑑 3 𝐺𝐻𝐺 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠  /  𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦𝑠𝑀 𝑟𝑒𝑣𝑒𝑛𝑢𝑒)

(10) ‘GHG intensity of sovereigns’ shall be calculated in accordance with the following formula:

(𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 (€𝑀))

×

(𝑇𝑒 𝑐𝑜𝑢𝑛𝑡𝑟𝑦𝑠 𝑆𝑐𝑜𝑝𝑒 1,2 𝑎𝑛𝑑 3 𝐺𝐻𝐺 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠  /  𝐺𝑟𝑜𝑠𝑠 𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖(𝑀))

Conclusio

Normally Co2e emissions are consolidated at those (parent) companies that are holding a stake in a subsidiary (Equity Share/Financial Control or Operational control). But from a financing perspective a different view needs to be taken. The liability side of the balance sheets shows the equity and debt i.e. the financed capital. An investor’s share of the equity and debt of a company shall determine its respective Co2e-share, as investors could finance equity or (interest-bearing) debt.

The Enterprise Value is defined as: As the sum of the market prices for equity and debt capital.  And from a financing point of view the investors (be it equity or fixed income) are “financing” a certain share of the total Co2 emissions of a company. From a financing perspective it is therefore correct to calculate the share of emissions not only based on the equity share (as it would be done by a group of companies), but on the share of the Enterprise Value (i.e. the financing share of the total financed capital (equity and debt)).  

The U.S. take a different approach, as they are focusing on the originator of CO2, i.e. the company. In Europe the banks and asset managers shall help to redirect the money to green investments. Contact us to implement the ESG regulations.

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Georg Tichy

Georg Tichy is a management consultant in Europe, focusing on top-management consultancy, projectmanagement, corporate reporting and fundingsupport. Dr. Georg Tichy is also trainer, lecturer at university and advisor on current economic issues. Contact me or Book a Meeting