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- Scoop Market Mysteries 2-13-22 - Emissions Reporting
Scoop Market Mysteries 2-13-22 - Emissions Reporting
🔎 Market Mysteries: Why is it so hard to get companies to reduce their emissions?
Market Mysteries of the week
Why is it so hard to get companies to reduce their emissions?
Answer:
Because we don't really even know how much they're emitting.
There's little regulation and standardization for emissions reporting
. If companies aren't required to report, or report in the same way, we don't have the data to hold them accountable.
What are the problems with emissions reporting?
A big problem with emissions reporting is that
not every company must disclose this information
. Only corporations that produce a
(oil and gas, waste, refineries, electronics manufacturing, etc.) must report their emissions annually to the EPA. Last year 8,000 facilities were required to report their emissions to the EPA, which account for approximately 85-90% of total US greenhouse gas emissions. It's estimated that
Most other companies who report their emissions do so voluntarily
or are
. Only about
in the US disclosed their emissions data voluntarily last year.
How do corporations report their emissions?
Corporations that voluntarily report their emissions can do so
using the Greenhouse Gas (GHG) Protocol
. The GHG Protocol is a global framework developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). The GHG Protocol is a highly credible resource developed by experts in GHG accounting that companies can use to assess and report their emissions under
.
Scope 1 emissions come directly from the activities of an organization. Scope 2 emissions come from the generation of an organization's purchased energy. And Scope 3 emissions come from the total activity of an organization's entire value chain. Some activities that fall under Scope 3 include business travel, purchased goods and services, supplier transportation, and the actual use of sold products. Unfortunately, reporting
Scope 3 emissions (which can account for 70% or more of a company's total footprint) is not required under the GHG Protocol.
Why do we need standardization?
Since it isn't currently required for many companies, and there isn't a standardized way to report emissions, the
data reported can be vague or misleading
. Companies have a lot of leeway with how they define their emissions.
For example, Apple, Microsoft, and Amazon all include different metrics when calculating Scope 3 emissions.
What
includes in its Scope 3 emissions calculation:
Business travel and employee commuting
Product manufacturing
Product transport
Product use
Material recovery
What
includes in its Scope 3 emissions calculation:
Purchased goods and services
Capital goods
Fuel and energy-related activities
Upstream transportation
Waste
Business travel and employee commuting
Downstream transportation
Product use
End-of-life of sold products
Downstream leased assets
What
includes in its Scope 3 emissions calculation:
Corporate purchases and Amazon-branded product emissions
Capital goods
Lifecycle emissions from customer trips to physical Amazon stores
Other indirect emissions
The differences are as vague as they sound.
Not only might companies be measuring different things, but the way they measure those things can be different as well. How Apple counts business travel and employee commuting may differ from how Microsoft estimates it. Do they include emissions if they take a city bus, or just if it's a personal car? Do they assume an average amount per employee?
Inconsistent data collection leads to varying strategies for addressing these emissions.
When measurement and reporting strategies differ, it is essentially
impossible to track the relative progress of companies' actions addressing their climate commitments
. Looking at a corporate sustainability report, you could learn that
. In comparison
. It's as tricky as it sounds to determine which company is reducing emissions more quickly or to a greater degree.
How do the ESG ratings work, then?
Inconsistent data means inconsistent ratings.
Demand for Environmental, Social, and Governance (ESG) rankings is exploding. However, ESG providers and investors still lack consistent data and comparable metrics needed to provide accurate or relevant ratings for investors. Even though companies report on common themes (such as emissions), their data and actions to address these issues are not always easily comparable to other companies' data and activities. To produce ESG ratings, providers such as MSCI, Sustainalytics, and JUST Capital are doing what they can to consolidate the information disclosed by companies. However, the evaluation process can still be quite arbitrary and qualitative.
Is anyone fixing this problem?
The good news is that the wheels are
moving towards standardization and regulation
. Regulations requiring emissions disclosure (including Scope 3) will help investors concerned about climate risk make better decisions about their investments. The US Securities and Exchange Commission (SEC) is currently considering a climate rule that will require public companies to disclose information about their emissions. However, there is
. Once companies are required to report their emissions, hopefully, more standardized reporting methods will follow.
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