By now we’re used to stats that show what would happen if everyone in the world had the same carbon footprint as a European, or an American, someone in China, or indeed anywhere. According to the consultancy right. based on science, they have now created a way of modelling the same projections, except for specific companies. The model also number-crunches a company’s climate strategy to work out whether they are going to help or hinder the race to cut emissions. Hannah Helmke and Roman Herzog of right. based on science explain how it works and how it should be used to make companies realistic about their ambitions.
A better way of calculating a single company’s contribution to global warming
As climate change gains financial relevance, companies from all sectors are proudly claiming to have the best methods and strategies in place to reduce their carbon footprint. This sounds uplifting at a first glance, but when we dive deep into their strategies there seems to be a missing link between the strategies companies claim to be enacting and the real environmental benefits they actually deliver.
“Regarding Climate Change: Enel is one step ahead” claims Enel S.p.A., the Italian utility company. However, the earth would warm up to 6.08°C (using the Standard XDC 2016 model) by 2050 if every company performed as Enel S.p.A does. So, what does this mean? This means that a necessary link, based on scientific findings, needs to be established and acted upon if companies are in fact serious about complying with the 2°C target agreed upon by the global community, under the Paris Climate Agreement.
How can companies measure if their strategies can hit the 1.5°C/2°C target?
Our X-Degree Compatibility (XDC) Model calculates a company’s climate impact based on scientific input by the Intergovernmental Panel on Climate Change (IPCC) and other accredited institutions, and models that specific company´s financial performance, in order to calculate how much global warming would take place if all companies operated as emission intensively as the company in question. As previously mentioned, ENEL S.p.A, would contribute to global temperatures increasing to 6.08°C by 2050. Very far off the 2°C target.
So, what can companies do? They can start by calculating their XDC and determining if their strategy is green enough. In order to do this we at right. based on science, an information and consulting company, with the support of the Department of Energy of the City of Frankfurt and the European Union, have developed the XDC web application (XDC webApp).
The XDC webApp reduces the complexity of calculating your standard XDC to a minimum. With a few clicks companies will be able to figure out where they stand. You can try it out for yourself. After having calculated their XDC, they can first assess their performance against their sector, which is also provided when using the XDC webApp and depending on the results, choose a strategy that at least brings them close to that target.
To take an example from the chemicals sector, we find a wide range of variance between companies’ XDC (using the Standard XDC 2016 model): Givaudan SA, with an XDC of 2.06°C ranks much better than LANXESS AG with and XDC of 6.54°C. In order to make this comparison valid, we pay attention to the company´s size, financial and environmental performance, and then compare the results to its targets, to determine how realistic the company´s strategy is for providing an effective response to global warming.
What do you need to calculate your XDC?
Normally, the Model’s variable input parameters are easily available. They consist of a company’s (i) emissions and (ii) gross value added (GVA). We obtain a company’s emission data and that from its respective sector from a list of outstanding data suppliers. As a user of the XDC Model, you can choose which data base you want the XDC to be calculated upon. We obtain country emission data exclusively from public sources. Through the European Space Agency Business Incubation Centre Darmstadt (ESA BIC), we also have access to satellite data, which we will use in the future for country specific XDC calculations. Information on a company’s and sector’s GVA we obtain from FactSet Research Systems.
In principle the XDC is available in two different forms: The Standard XDC and the Scenario Based XDC. The Standard XDC, with sector-specific default parameters allows you to compare your company to others within the sector. The Standard XDC is calculated under the assumption of global GVA increasing by 3.2 % on an annual basis until 2050 (taken from the IMF’s World Economic Outlook figures). The company’s growth is mapped along sector-specific lines according to these accredited sources. The relationship between emissions and GVA remains fixed in a business-as-usual scenario until 2050.
Capturing all the data, not just the direct emissions
The model incorporates Scope 1, Scope 2 and Scope 3 data. Scope 1 emissions are direct GHG emissions which occur from sources that are owned or controlled by the company. Scope 2 emissions are GHG emissions from the generation of purchased electricity consumed by a company and Scope 3 emissions account for all other indirect emissions. In order to avoid double counting , Scope 1 emissions account for 100%, while Scope 2 and 3 emissions each account for 50%. All the estimations for a company can be plausibly varied to calculate a Scenario Based XDC. The Scenario Based XDC integrates a company’s specific information and allows an XDC to be mapped out according to various scenarios. This is the optimal way to analyse a company’s climate-relevant issues. By this, climate targets, ambitious growth plans, expansion strategies and the effect of low-emission technologies on supply chains, can be incorporated into individual scenarios. You can click here for a short demo, on how to input your data and obtain your XDC.
Which sectors have the largest carbon footprints?
The energy sector is of course the first and most carbon intensive sector, encompassing electricity and heat. Transportation comes just after, followed by manufacturing industries and construction; with residential buildings and commercial and public services coming in as the last defined sector easily linked with a considerable carbon footprint .
Does this mean that the energy transition will wipe out entire sectors and industries from one day to the other? No, its does not. It does, nonetheless, mean that many companies will struggle while others thrive, and what is most likely to determine the success of individual companies is their capacity to adapt to a world limited by finite resources. This adaptation will take place on many fronts, starting with companies’ capacity to internalise climate change and the costs, liabilities and opportunities linked to it.
How will this help reduce emission?
For those who need to understand a company’s environmental impact, the XDC provides a first good measurement. As shown previously, within the same industry, the level of variance among specific companies varies drastically. The XDC, can therefore support investors on deciding which companies are likely to be in existence and profitable in the long term.
We are also developing science-based climate and economic models that will allow companies and investors to model their impacts under different assumptions, and therefore choose what strategies and pathways will support their survival and profitability in a world shaped by a changing climate.
At the end of January we held a webinar to demonstrate how the XDC Model could measure a single company’s contribution to climate change, along with a question and answer session. You can have a glimpse at the questions or watch the entire webinar, by accessing the recording here. If you still have any questions after viewing the recording, feel free to contact us at: firstname.lastname@example.org
About the authors:
Hannah Helmke is the CEO at right. based on science
Roman Herzog is in charge of developing business relations at right. based on science
right. based on science is an information and consulting company founded in August 2016, which measures a single economic entity’s contribution, be that of e.g. a company or a lending project, to man made climate change. With a team of experts with backgrounds in law, science, economics, psychology and mathematics, right. is devoted to the development of the XDC Model, which calculates science-based climate metrics on the basis of latest climate research and regulatory requirements, in order to deduct an entity’s X-Degree Compatibility