The metric investors ask for is easy to compute and easy to move without cutting a tonne: here is the calculation, and what it does and does not measure.
Weighted average carbon intensity (WACI) is the sum, across holdings, of each company's share of portfolio value multiplied by its emissions per million of revenue. On an illustrative five-company private equity portfolio worth 150.0 million it comes to 202.7 tonnes of CO2e per million of revenue. One company holding 13.3 per cent of the value supplies 52.6 per cent of that figure, which is the first thing the number should tell you.
Worked in full in The ESG Manager in Private Equity by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
WACI is the portfolio carbon metric the TCFD recommended to asset managers, and its formula sits behind the SFDR principal adverse impact indicator on the GHG intensity of investee companies. Limited partners now ask for it in the annual ESG questionnaire alongside financed emissions. It needs no ownership share and no enterprise value, which makes it the easiest carbon metric to produce for a private portfolio and also the easiest to move without changing anything in the real economy.
| Company | Holding value | Revenue | Scope 1+2 tCO2e |
|---|---|---|---|
| Software | 40.0 | 60.0 | 900 |
| Logistics | 30.0 | 120.0 | 36,000 |
| Food manufacturing | 25.0 | 90.0 | 13,500 |
| Healthcare clinics | 35.0 | 70.0 | 2,100 |
| Building materials | 20.0 | 50.0 | 40,000 |
| Portfolio | 150.0 | 390.0 | 92,500 |
WACI = Σ (holding valuei ÷ portfolio value) × (emissionsi ÷ revenuei)
In Excel, with holding values in B2:B6, revenue in C2:C6 and emissions in D2:D6: =SUMPRODUCT(B2:B6/SUM(B2:B6),D2:D6/C2:C6). The result is in tonnes of CO2e per million of revenue, in the currency the revenue is reported in.
Three steps. First, each company's intensity: emissions divided by revenue. Second, each company's weight: its holding value divided by the 150.0 million total. Third, multiply the two and add the products.
| Company | Weight | tCO2e per m revenue | Contribution | Share of WACI |
|---|---|---|---|---|
| Software | 26.7% | 15.0 | 4.0 | 2.0% |
| Logistics | 20.0% | 300.0 | 60.0 | 29.6% |
| Food manufacturing | 16.7% | 150.0 | 25.0 | 12.3% |
| Healthcare clinics | 23.3% | 30.0 | 7.0 | 3.5% |
| Building materials | 13.3% | 800.0 | 106.7 | 52.6% |
| WACI | 100% | 202.7 | 100% |
The portfolio's WACI is 202.7 tCO2e per million of revenue. Read the contribution column before the total. Two companies, building materials and logistics, are a third of the capital and supply 82 per cent of the metric between them. The software and healthcare holdings, half the capital, contribute 11.0 tonnes per million out of 202.7. Any engagement plan aimed at the number starts and ends with the two heavy companies.
The two tempting shortcuts give different answers. The portfolio's combined 92,500 tonnes over its combined 390.0 million of revenue is 237.2, 17.0 per cent higher, because it weights each company by its revenue rather than by the fund's money in it: logistics has the largest revenue and a high intensity, so it pulls the ratio up. A simple average of the five intensities is 259.0, which weights a 20.0 million holding the same as a 40.0 million one. Neither is WACI, and an LP comparing your figure with another manager's needs the same definition on both sides.
Scope matters as much as the formula. The figures here are scope 1 and 2. The SFDR indicator includes scope 3, which for the food manufacturer and the building materials company would be several times larger and mostly estimated. State the scopes, the emissions year and the revenue year in the footnote, and keep them the same from one report to the next.
| Change | WACI | Change | Tonnes avoided |
|---|---|---|---|
| Base case | 202.7 | ||
| Building materials cuts emissions 25% | 176.0 | −13.2% | 10,000 |
| Logistics cuts emissions 25% | 187.7 | −7.4% | 9,000 |
| Building materials raises prices 20%, same tonnes | 184.9 | −8.8% | 0 |
| Software holding marked up twofold | 163.2 | −19.5% | 0 |
| Building materials sold | 110.8 | −45.3% | 0 |
The table is the reason WACI cannot be reported alone. A genuine 10,000-tonne reduction at the most carbon-intensive company is worth 13.2 per cent. A valuation uplift on the software business, which changes nothing about anyone's emissions, is worth 19.5 per cent. A price increase that lifts revenue to 60.0 million, with the kilns burning exactly as before, takes the company's intensity from 800.0 to 666.7 and the portfolio figure down 8.8 per cent. And selling the building materials company to a buyer that runs it unchanged nearly halves the metric. Every one of those is a correct WACI.
The mirror image also holds. A fund that buys a carbon-intensive business in order to decarbonise it will see its WACI jump on the day of acquisition and fall only slowly. That is a reporting outcome to explain in the narrative, not a reason to avoid the deal.
Compute WACI as SUMPRODUCT of value weights and revenue intensities, here 202.7 tonnes per million, and then publish the contribution column with it, because the useful information is that one 20.0 million holding produces more than half of the number. The ESG manager's job is to make sure the figure that falls is the one with tonnes behind it. The free workbook and working documents for this book carry the value-creation and carbon arithmetic through to equity, and the financed emissions calculation gives the attributed, absolute number that WACI leaves out.
WACI weights each company's emissions per million of revenue by its share of portfolio value, so it measures exposure to carbon-intensive business models and needs no ownership share. A carbon footprint divides the fund's attributed (financed) emissions by the amount invested. In the illustrative portfolio WACI is 202.7 tonnes per million of revenue; the footprint answers a different question and is computed with EVIC-based attribution.
Dividing the portfolio's 92,500 tonnes by its 390.0 million of combined revenue gives 237.2, which weights each company by its revenue, not by the fund's money in it. WACI weights by holding value and gives 202.7. The two diverge whenever large, low-value businesses are more or less carbon intensive than the companies the fund has the most capital in.
Not necessarily. In the illustrative case, a 25 per cent cut at the building materials company, 10,000 tonnes, lowers WACI by 13.2 per cent. Selling that company lowers it by 45.3 per cent and marking the software company up twofold lowers it by 19.5 per cent, with no tonne avoided in either case. Report the absolute emissions beside the WACI.
This article is one calculation from The ESG Manager in Private Equity. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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