Climate and Valuation: Listed Equity and Debt
This domain tests the mechanics of attributing emissions to a listed holding, the metrics you report, and how climate risk actually reaches a discounted cash flow or a credit spread.
Attribution and financed emissions
PCAF methodology: financed emissions equal the attribution factor multiplied by the borrower's emissions. For corporate holdings the attribution factor is the outstanding amount divided by enterprise value including cash; project finance, real estate and sovereign exposures use different denominators. Scope 1 and 2 are the reported base; Scope 3 is included where sector-material, and for oil and gas, banks and autos it dominates the number.
Portfolio metrics
Carbon footprint is tCO2e per million dollars invested, EVIC-based. Weighted average carbon intensity is tCO2e per million dollars of revenue, so it moves with pricing and margin, not just emissions. Keep the denominators straight: WACI is the one that is comparable across portfolios with different valuation multiples; footprint is the one that shrinks when markets fall, which is a denominator artefact, not decarbonisation. Implied temperature rise and brown revenue share are the forward-looking and exposure-oriented complements.
Transmission into valuation
In a DCF, climate enters through cash flow (carbon price, abatement capex, opex, volume mix, insurance), through the discount rate as a transition or physical risk premium, and through terminal value and asset life via stranding. In credit, a carbon cost feeds EBITDA, then leverage, then spread; unrated high-yield issuers in cement, shipping and chemicals carry most of it. Green bonds typically trade at a modest greenium of a few basis points, largest in EUR investment grade.
Worked example
A fund holds 10m of a utility with EVIC of 400m. Attribution is 10/400 = 2.5%. The utility emits 2.0 MtCO2e Scope 1 and 2, so financed emissions are 50,000 tCO2e. If the fund is 500m, its carbon footprint contribution is 50,000/500 = 100 tCO2e per million dollars invested. If the utility's revenue is 800m, the WACI contribution is 50,000/800 = 62.5 tCO2e per million dollars of revenue. Same holding, two numbers, two different questions.
Traps
Using market capitalisation instead of EVIC; double counting a utility's Scope 1 against an investor's own Scope 2; comparing footprints across portfolios with different sector weights; treating a falling carbon footprint as risk reduction when it is a valuation effect.