About the project

The objective of the "Just Profit" research project is to assess policy options to integrate the costs of greenhouse gas emissions into existing financial accounting and disclosure rules. Current approaches to align financial resources with the Paris-objective of limiting global warming to 1.5°C focus on charging some polluters for their emissions (carbon pricing) and/or promoting transparency about corporate carbon footprints (carbon disclosure).

The "Just Profit"-approach fills a gap in the current research and regulatory landscape by combining carbon disclosure and pricing elements. The approach translates corporate "ecological footprints" into "monetary footprints" and calculates CO₂-adjusted key financial performance indicators, thereby revealing the hidden costs of greenhouse gas emissions and increasing connectivity between financial and sustainability reporting. There are several related initiatives and concepts that provide an important conceptual foundation for our work referred to here.

As companies are contributing to and are themselves exposed to many of the consequences of climate change, CO₂-adjusted financial performance measures provide an objective unified metric enabling companies, investors, and business partners to combine financial and climate objectives in their financial analysis and investment decision-making processes. Explore in our Simulation how different design choices of how to calculate a CO₂-adjusted EBIT would change the profitability of certain sectors.

"Just Profit" is a joint research project by a Team of researchers at the University of Hamburg and the University of Cologne funded by the Mercator Foundation. We would love to hear your views on the topic - please participate in our mini Survey.

Background

Climate change matters. Estimates on the environmental, social and economic costs of climate change range from 1.7 to 3.1 trillion euros annually by 2050 (WEF, 2023). Physical risks from increased chronic and acute weather extremes are major sources of destruction for infrastructure, production locations and assets. Bringing economies on a net zero path comes with transition challenges for many companies including substitution of fossil with renewable energies and switching to carbon neutral technologies.

CO₂-adjusted metrics are needed. Four out of five large institutional investors consider climate change as a key factor for their financial decisions (PRI, 2023). As climate-related risks become material, there is a growing demand by investors to incorporate the ecological damage of greenhouse gas emissions and the value of climate mitigation action into their analyses. Yet, investors, shareholders, creditors and authorities often lack the information and metrics necessary to account for climate-related financial impacts, risks and resilience of companies objectively.

Carbon pricing measures are non-comprehensive. While carbon pricing increases the operating expenses for emission-intensive behavior through thereby affecting companies' financial results, often these measures (e.g., emission trading schemes or carbon taxes) are non-comprehensive - leading to (i) no cost or (ii) low cost in the income statement. According to CDP data, (i) only 20% of companies are subject to carbon pricing regimes (usually the heavy emitters) and even if they are, only half of their direct emissions are being priced, i.e., paid for. The price paid is usually (ii) far below scientific and governmental estimates of the social cost of carbon, that is, an estimate of the cost to society from emitting a tonne of carbon emissions. To counter such issues, there is a small yet increasing number of companies using internal carbon pricing as steering devices for their internal climate-related management and investment decisions (ICAP, 2024).