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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

. 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

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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