The EcoSmart-ProtocolTM (ESP) is a unique carbon accounting methodology that takes a completely novel approach to accounting for carbon emissions in complex supply chains and for carbon liabilities of the underlying company shares in an investment portfolio. In the current accounting model, companies wishing to assess their corporate emissions footprints must undertake a challenging process of quantifying the carbon footprint for each input in the entire supply chain using the “GHG Protocol”. This approach leads to successive layers of granularity where even the same input (raw material or component part) from different suppliers may have very distinct carbon emissions footprints. Trying to understand the carbon footprint of hundreds or thousands of inputs and looking behind the suppliers of those inputs into their supply chains presents a non-viable accounting approach, particularly for use at scale.

At the institutional Investment Fund level, this becomes an impossible undertaking as they are even further removed and must therefore rely on self-reported data which may be incomplete and/or inaccurate. Also, because the composition of the portfolio changes regularly, the liabilities of the underlying shares of the portfolio of companies cannot be calculated in real-time under the current accounting models.

Instead, the EcoSmart-ProtocolTM takes a broader Sub-Sector average approach and establishes a carbon density per $ of revenue and/or carbon density per $ of market cap. This creates a “value-add” approach that establishes a carbon density per dollar of value-add along the entire value stream. The result of assigning carbon liabilities in this way is that more emissions burden is assigned to companies (and their revenues) further down the value chain, which supports our hypothesis that carbon density burdens should be assigned based on a factor of value-add, and therefore more fairly distributed downstream closer to the consumer.

Definition of the EcoSmart-ProtocolTM

A carbon accounting methodology for measuring emissions liabilities using a library of sector carbon density per $ of transaction value (tCO2e/$) coefficients to benchmark emissions liabilities for all companies in a given sector based on a quantum of revenues and market cap and a sector average tCO2e/$ coefficient.

Objectively, any carbon risk or burden placed on resource companies upstream will necessarily have a compound effect on companies further downstream. Therefore, ultimately carbon liabilities have to flow downstream, which means that the current carbon accounting methodology, which places the burden on upstream resource companies without passing those downstream, is likely underestimating the carbon exposure of the downstream companies.

This theory is supported by the current political realities given that twice, first with Kyoto and now with the Paris Agreement, political expediency has given China and India a pass on emissions reporting and mitigating obligations. This necessarily means that the supply chain emissions liabilities of mass retailers like WalMart, Target and Home Depot that source primarily from China, or Financial and Tech companies that outsource heavily to India and Food and Fast Moving Consumer Goods companies like Unilever and Nestle that are major consumers of high impact agricultural goods like palm oil from Indonesia, are all being grossly underreported, with upstream liabilities unlikely to be accurately reported or mitigated in the foreseeable future.

While this is primarily an academic argument for the moment, we believe that this also creates latent risk on the public facing downstream consumer brand companies. When properly measuring where along the value chain the most carbon exposure lies, it seems clear that publicly traded global consumer brand companies are at far greater risk for brand value losses than privately held upstream suppliers in jurisdictions that are exempt from public scrutiny and/or from the Paris Accord until 2025 at a minimum.

EcoSmart-CarbonMetrics Toolbox

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Methodology

Our tools are powered by our own EcoSmart-ProtocolTM,  using a proprietary library of sectoral carbon density/$ coefficients, the methodology allows for rapid assessment of carbon exposure for 1000s of companies in all industries, including forecasting capabilities.

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Tools

EcoSmart Labs has developed a number of Carbon Risk assessment tools for institutional asset management professionals including a suite of index rankings and bespoke company specific assessment tools: CarbonRank, CarbonScore & CarbonRisk.

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Publications

Our team’s deep understanding of the environmental & carbon markets is shared with clients through a series of publications including the Financial Market Professionals’ Guide to Carbon Risk Assessment and periodic Industry Focus Risk Assessment Reports.

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