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Scientific Beta criticises use of Enterprise Value in European Benchmark Regulation

Scientific Beta
·3 min de lecture

Press Release - Boston, London, Nice, Paris, Singapore, Tokyo, November 12, 2020

Scientific Beta criticises use of Enterprise Value in European Benchmark Regulation

European Benchmark Regulation's switch from a robust market standard to alternative indicators is unhelpful in the pursuit of climate change mitigation

If global warming is to be curtailed to 1.5°C, then there is an urgent need for net greenhouse gas emissions to be sharply reduced, an achievement which can only be met by dramatic reductions in the carbon intensities of human activities.

Normalisation of emissions by revenues is an established standard in the market and a feature of the weighted average carbon intensity metric recommended for reporting by the Task Force on Climate-related Financial Disclosures1. However, the proposed delegated act setting out the requirements for EU Climate Benchmarks has recently mandated the use of enterprise value including cash for normalisation. This variation on carbon intensity has not been properly justified or thought through. The group that assisted the regulator represented that the shift from market value of products and services to market valuation of the producer would be detrimental to the coal industry and that enterprise-value-based carbon intensity would be applicable across equity and fixed income indices. However, beyond coal, all companies with a lower than average enterprise value to sales ratio suffer from this unjustified shift.

Stakeholder feedback led the regulator to account for some of the data issues and biases plaguing enterprise value. However, a fundamental issue that remains insufficiently addressed is that enterprise value embarks equity market volatility. This weakens the link between changes in measured carbon intensity and underlying emissions, and produces carbon intensity volatility that facilitates greenwashing. In both respects, the market standard appears preferable.

In a new white paper entitled "Carbon Intensity Bumps on the Way to Net Zero," Scientific Beta's Frederic Ducoulombier, ESG Director, and Victor Liu, Quantitative Analyst, conclude that the European Benchmark Regulation's switch from a robust market standard to alternative indicators is unhelpful in the pursuit of climate change mitigation. From a climate impact point of view, one should avoid guiding portfolio construction by enterprise value-based carbon intensity. Investors wishing to allocate to EU Climate Benchmarks without encouraging greenwashing should ensure methodologies make use of this metric to the minimum extent required for compliance.

The Scientific Beta white paper on the subject can be accessed through the link below:

Carbon Intensity Bumps on the Way to Net Zero

Issues with the EU regulation and emissions data are further discussed in two other white papers:

A Critical Appraisal of Recent EU Regulatory Developments Pertaining to Climate Indices and Sustainability Disclosures for Passive Investment

Understanding the Importance of Scope 3 Emissions and the Implications of Data Limitations


1 Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures, Financial Stability Board, 2017, p. 44.

Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
Scientific Beta, 1 George Street, #15-02, Singapore 049145. For further information, please contact: contact@scientificbeta.com, Web: www.scientificbeta.com.

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