Carbon Rating Framework

The report argues that current credit ratings and ESG frameworks fail to adequately measure a company's environmental impact, creating a gap that hinders transition finance for hard-to-abate sectors like steel and cement. To address this, the Climate Policy Initiative proposes a Carbon Rating Framework that evaluates a company's carbon emission intensity over a three-to-five-year horizon. The framework suggests a weighted approach combining past emission intensity (indicatively 70%) and projected future intensity (indicatively 30%), the latter being a function of projected emissions and revenue. The authors propose a 10-point rating scale based on the distribution of carbon intensity among companies reporting under SEBI's Business Responsibility & Sustainability Report (BRSR). The framework focuses on Scope 1 and Scope 2 emissions at the company level and suggests a composite rating system to account for sector-specific challenges in hard-to-abate industries.

• Current credit rating systems are insufficient for enabling transition finance because they focus on debt repayment capacity and do not measure emissions intensity, which can lead to the unintended consequence of discouraging investment in climate-positive businesses due to perceived higher risks associated with new technologies.
• Existing climate-related financial products are categorized into risk, alignment, compliance, and impact; however, most current tools focus on the risks climate change poses to a company (single materiality) rather than the company's impact on the environment (double materiality).
• India faces a significant investment gap for hard-to-abate sectors such as steel and cement, with total climate action financial flows currently representing only 25% of the estimated USD 2.5 trillion needed by 2030 for its Nationally Determined Contribution (NDC).
• The proposed Carbon Rating Framework evaluates companies based on a weighted average of past and projected emission intensity, suggesting an initial split of 70% for past data and 30% for future projections, with the latter potentially discounted by year to reflect the time value of carbon.
• Projected future emission intensity is calculated as the ratio of projected future emissions to projected future revenue, where emissions are determined by quantitative factors (e.g., investments in reduction efforts) and qualitative factors (e.g., management commitment and technology availability).
• The framework suggests a 10-point rating scale calibrated against the distribution of carbon intensity of Indian companies that publish Business Responsibility & Sustainability Reports (BRSR), where the lowest 5th percentile of emission intensity receives the highest rating.
• To prevent hard-to-abate sectors from being unfairly penalized by a common rating scale, the framework considers a composite two-part rating (e.g., CR7-a) that includes a sector-specific sub-scale.

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} }