Investors struggle to find green companies with new emissions reporting rules.

Investors struggle to find green companies with new emissions reporting rules.

The Challenges of Comparing Emissions Reporting: From Ford vs Toyota to Shell vs BP

greenhouse gas emissions

Is Ford doing a better job of cutting emissions than rival Toyota? Is BP greener than Shell? These are vital questions for investors looking to weed out climate laggards from their portfolios. However, existing guidelines on emissions reporting, as well as 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. These guidelines will form part of the framework for compulsory EU standards set to take effect next year. The United States is also on track to announce similar rules this year. However, while the GHGP has been crucial in shining a light on corporate emissions, it can be hard to compare companies due to potential differences in disclosures, and this will likely remain the case 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.

The Difficulty of Comparing Lifetime Emissions

The autos sector is a prime example of the challenges in comparing emissions reporting. While 20 of the top 30 automakers report emissions linked to their supply chains (known as Scope 3 under the protocol), there is a range of approaches in how they disclose the data and 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 kilometer driven. This lack of standardized data makes comparisons problematic. An unrealistically low lifetime figure could make cars appear less polluting than they really are, according to David Lubin, Executive Chairman of research firm Signal Climate Analytics (SCA).

Take Japanese carmaker Subaru as an example. In its 2021 public submission to CDP (formerly the Carbon Disclosure Project), Subaru stated that its cars run for 130,000 km (80,000 miles) over their lifetime. However, in 2022, Subaru did not disclose a figure. A search on the British version of the second-hand car site AutoTrader on July 31 showed 988 Subarus for sale, of which 263 had done at least 80,000 miles. Subaru later clarified that the 130,000 km figure referred to vehicles sold in Japan. For the EU, Subaru used 162,500 km, and for North America, it used 228,800 km, information it had not previously made public.

Comparing “Apples to Oranges”

Scope 3 emissions, which rely on data from customers and suppliers, are particularly challenging to assess. Laura Kane, head of ESG research at Voya Investment Management, explains that in many cases, comparing emissions data from different companies is like comparing “apples to oranges.” Even when third-party data providers attempt to normalize and score the data, there is significant variation due to inconsistent reporting and 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. This inequality further complexifies the challenge of comparing emissions data.

Patchwork of Rules

To address these challenges, new carbon disclosure standards are being implemented. The EU is making carbon disclosures mandatory for about 50,000 companies operating in the bloc from next year. Similarly, new rules are expected in the United States. These binding rules aim to replace the patchwork of private sector norms and crack down on greenwashing or exaggerated climate-friendly claims by companies.

While there are criticisms of the GHGP, European and U.S. regulators acknowledge that these new standards are just the start of a journey towards more accurate reporting. Best practices, pressure from markets and peers, and bespoke sector disclosures are expected to emerge over the next five years, improving accuracy. Countries may also require disclosures to be independently audited, similar to financial reports.

Pedro Faria, environmental leader at EFRAG, the EU body that drafted the bloc’s disclosure standards, highlights that while methodological issues exist in carbon reporting, other aspects such as investments, transition plans, and changes in strategy are just as important. Ultimately, the quality of emissions reporting will continue to evolve and improve alongside these new standards.

The GHGP is currently conducting a consultation on possible changes to its framework. Over 230 proposals have been submitted, and any changes are expected to take effect from 2025 at the earliest. Feedback from the consultation process will inform the scope and potential approaches for updates to existing standards or the development of additional guidance.

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In conclusion, comparing emissions reporting is a complex task. Existing guidelines often leave room for interpretation, making it challenging to compare companies. The difficulties arise from differences in disclosures, assumptions, and calculation methods. However, as new standards and regulations come into effect, the quality and accuracy of emissions reporting are expected to improve. Best practices, independent audits, and sector-specific disclosures will contribute to a more comprehensive and reliable framework for assessing and comparing emissions data.

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