Carbon Rating Framework

This white paper by the Climate Policy Initiative (CPI) proposes a Carbon Rating Framework designed to help the financial sector incorporate emissions intensity into investment and lending evaluations, specifically to enable transition finance for hard-to-abate sectors in India.

• India faces a significant investment gap for climate action, requiring an estimated USD 2.5 trillion by 2030 to meet its Nationally Determined Contribution (NDC). Current financial flows meet only 25% of this need, with most funding directed toward energy efficiency and renewable energy, leaving hard-to-abate sectors like cement and steel underserved.
• Conventional credit rating systems are insufficient for enabling transition finance because they focus on debt repayment capacity rather than environmental impact. This can inadvertently penalize climate-positive businesses that use new technologies or unproven models, as they may be perceived as higher risk than established carbon-intensive activities.
• Existing climate-related financial products are categorized into Compliance, Risk, Alignment, and Impact. CPI notes that most current offerings focus on 'single materiality' (risks to the company) rather than 'double materiality' (the company's external impacts), failing to accurately quantify the benefits of transitioning to a low-carbon economy.
• The proposed Carbon Rating Framework evaluates business entities on carbon emission intensity over a three-to-five-year horizon. The methodology focuses on company-level ratings using Scope 1 and Scope 2 emissions, excluding Scope 3 due to current data reliability and availability issues.
• The framework calculates a rating based on a weighted average of past and projected emission intensity. Initially, CPI suggests a weighting of 70% for past intensity and 30% for projected intensity, with the latter split across years (e.g., 12%, 10%, and 8% for Years 1-3) to account for the time value of carbon.
• Projected future emission intensity is determined by the ratio of projected emissions to projected revenue. The numerator (emissions) is evaluated through quantitative factors, such as technical audits and investment adequacy, and qualitative factors, including management commitment and the availability of low-carbon technologies.
• To avoid penalizing hard-to-abate sectors that are inherently more carbon-intensive than others, the framework considers a composite two-part rating scale. This would combine a general carbon rating (e.g., CR7) with a sector-specific suffix (e.g., 'a' for best in sector) to distinguish leaders from laggards within their own industry.
• The framework is intended to complement existing regulatory efforts in India, such as the Securities and Exchange Board of India (SEBI) mandate for ESG rating providers to offer a 'Parivartan' or transition score, which tracks incremental changes toward Net Zero goals.

APA

Khanna, N., Gada, K., & Purkayastha, D. (2024). Carbon Rating Framework. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2024/08/Carbon-Rating-Framework.pdf

Chicago

Khanna, Neha, Kalpesh Gada, and Dhruba Purkayastha. Carbon Rating Framework. Climate Policy Initiative, 2024. https://www.climatepolicyinitiative.org/wp-content/uploads/2024/08/Carbon-Rating-Framework.pdf.

Wikipedia

{{cite report |last1=Khanna |first1=Neha |last2=Gada |first2=Kalpesh |last3=Purkayastha |first3=Dhruba |title=Carbon Rating Framework |publisher=Climate Policy Initiative |date=August 2024 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2024/08/Carbon-Rating-Framework.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{khanna2024carbon, author = {Khanna, Neha and Gada, Kalpesh and Purkayastha, Dhruba}, title = {{Carbon Rating Framework}}, institution = {Climate Policy Initiative}, year = {2024}, month = aug, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2024/08/Carbon-Rating-Framework.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }