For investors, green companies still hard to find with new emissions
reporting rules
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[August 02, 2023] By
Simon Jessop and Huw Jones
LONDON (Reuters) - Is Ford doing a better job of cutting emissions than
rival Toyota? Is BP greener than Shell?
For investors looking to weed out climate laggards from portfolios,
these are vital questions but existing guidelines on emissions reporting
and new rules due to come in for the United States and Europe are
unlikely to provide hard answers. Most major Western companies use the
Greenhouse Gas Protocol (GHGP) Corporate Standard for reporting
emissions and the guidelines will form part of the framework for
compulsory EU standards set to take effect next year.
The United States is on track to announce similar rules this year and
the corporate standard, first launched in 2001 and revised in 2004, is
also embedded in other international emissions reporting standards. But
the guidelines, which are overseen by the World Business Council for
Sustainable Development and World Resources Institute, define the three
main categories of emissions companies should report broadly, leaving
plenty of room for interpretation. Half a dozen investors interviewed by
Reuters said while the GHGP has been crucial in shining a light on
corporate emissions, it can be hard to compare companies given the
potential for differences in disclosures, and this will remain the case
to some extent even with new mandatory norms. "More companies are
disclosing, but at what quality are they actually going to disclose?"
said Vanessa Bingle, director at Alpha Financial Markets Consulting,
which advises asset managers on sustainable investing.
LIFETIME EMISSIONS
Take the autos sector.
Although 20 of the top 30 automakers report emissions linked to their
supply chains – known as Scope 3 under the protocol - analysis by
research firm Signal Climate Analytics (SCA) seen by Reuters showed a
range of approaches in how they disclose the data and for the
assumptions underpinning their calculations. For example, as of March
2023, only five carmakers have disclosed their assumptions for the
average life of their vehicles and grams of carbon dioxide equivalent
emitted per kilometre driven.
That makes comparisons problematic. An unrealistically low lifetime
figure could make cars appear less polluting than they really are, SCA
Executive Chairman David Lubin said. In its 2021 public submission to
CDP – a non-profit that runs the global disclosure system on
environmental impacts for investors, companies and governments -
Japanese carmaker Subaru said its cars run for 130,000 km (80,000 miles)
over their lifetime. In 2022, it did not disclose a figure. A search of
the British version of second-hand car siteAutoTrader on July 31 showed
988 Subarus for sale, of which 263, or a quarter, had done at least
80,000 miles. Subaru told Reuters the 130,000 km figure referred
tovehicles sold in Japan. For the EU, it used 162,500 km and for North
America, where it books most of its sales, 228,800 km, information it
has not previously made public. A spokesperson said Subaru did not
include a lifetime number in its 2022 disclosure because it wanted to
avoid confusion with an incomplete description. "We now believe it's
better to disclose the lifetime distance assumptions by region in our
next disclosure (2023)."
APPLES AND ORANGES
Experts said Scope 3 emissions were the hardest of the three areas to
assess as companies have to rely on data from customers and suppliers
for their calculations. SCA's Lubin said Scope 3 data was quite limited
in its usefulness without researching how firms come up with their
numbers and how reasonable the assumptions underpinning their data are.
Nonetheless, many investors scrutinise carbon emissions data to gauge
how polluting a company is, how it compares with rivals and how this
might affect its bottom line and share price. For Laura Kane, head of
ESG research at Voya Investment Management, which is part of Voya
Financial and oversees about $323 billion in assets, in many cases, it's
like comparing apples to oranges. Kane said her firm buys third-party
data from ratings providers, which aim to normalise and score the data,
making it more comparable across sectors, yet this brings its own
challenges. She declined to name the providers. "There is quite a bit of
variation among providers ... due to inconsistent reporting from
companies, as well as different estimation and aggregation
methodologies." Only big investors have deep enough pockets to pay for
such data and employ teams to assess it, leaving smaller investors at a
disadvantage, experts say.
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An exhaust pipe of a car is pictured on
a street in a Berlin, Germany, February 22, 2018. REUTERS/Fabrizio
Bensch/File Photo
PATCHWORK OF RULES
The EU has made carbon disclosures mandatory for about 50,000
companies operating in the bloc from next year while new U.S. rules
should come this year as governments look to replace a patchwork of
private sector norms with binding rules, making it easier to crack
down on greenwashing or exaggerated climate-friendly claims by
companies.
The International Sustainability Standards Board (ISSB), a
standards-setter established by the IFRS Foundation that produces
international accounting norms, has also approved rules any country
can adopt. Some countries, including Britain, have said those
guidelines will become mandatory. Jimmy Jia, researcher at the
Oxford Smith School of Enterprise and the Environment, said as well
as differences in defining what should be counted under existing
GHGP guidelines, companies may use different calculation processes
or present data in different ways. "Investors need to understand if
a difference is due to an operational difference, or because the
entities applied different accounting methodologies," said Jia said,
co-author of a study on emissions data comparability. Another area
of investor concern is how companies account for their own energy
use, or Scope 2 emissions.
The GHGP allows companies to buy green energy to offset their
emissions, using contractual instruments such as renewable energy
certificates, and reflect this in their reporting.
But the protocol also allows different accounting methods -
market-based or location-based - to be used when companies calculate
Scope 2 numbers. The market-based approach, however, may not
accurately reflect how used energy was generated, potentially
resulting in investors concluding a company is less polluting than
it is, some investors said. "Market-based methods open up the door
to creative accounting," British asset manager abrdn said in its
response to a GHGP consultation that closed on March 14. Of 8,400
companies to report data globally to CDP, 70% reported Scope 2 data,
with 31% giving both market and location-based figures, 33% only a
location-based number and 6% just market-based, CDP data shared with
Reuters showed.
CONSULTATION ON CHANGES
European and U.S. regulators and officials at the ISSB interviewed
by Reuters acknowledge the criticisms of GHGP but argue that the new
EU, U.S. and global standards are just the start of a journey to
more accurate reporting. Best-practice, pressure from markets, and
peers, along with bespoke sector disclosures, will emerge over the
next five years or so to improve accuracy, as will countries
requiring disclosures to be independently audited, as they do for
financial reports, regulators say. A spokesperson for the U.S.
Securities and Exchange Commission declined to comment. Pedro Faria,
environmental leader at EFRAG, the EU body that drafted the bloc's
disclosure standards, said the priority was to make disclosures
mandatory before improving the quality, and that they are just one
piece of the puzzle. "Ultimately, the thing that you need from
(companies) is the big chunk of emissions and yes, there are
methodological issues there, but also their investments, their
transition plans, changes in strategy, and some of those aspects are
even more important than precise carbon numbers," Faria said.
The GHGP's consultation on possible changes to its framework drew
over 230 proposals, of which 150 were made public while the others
requested privacy. Any changes would likely take effect from 2025,
at the earliest, according to GHGP.
"All feedback shared during that process will be reviewed by GHG
Protocol including its Technical Working Groups and will inform the
scope and potential approaches to make updates to existing standards
or development of additional guidance," said Pankaj Bhatia, director
of GHG Protocol.
(Additional reporting by Douglas Gillison; Graphics by Sumanta Sen;
Editing by Dan Flynn and David Clarke)
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