FTSE Russell paper reveals wide variations across countries, sectors and company size for Scope 1 and 2 emissions.
While accurate emissions data is increasingly critical for capital allocation, FTSE Russell says there remains a material disclosure gap “with considerable variation” in reporting levels according to company size, region and sector. Mandatory disclosure standards for listed corporates, as implemented in the UK and proposed by the US Securities and Exchange Commission, are “urgently required” for emissions data, the index provider said in a new paper.
FTSE Russell believes the choice of methods used to estimate Scope 1 – direct greenhouse gas (GHG) emissions – and Scope 2 – indirect emissions from the generation of purchased energy – “carries greater significance than is often assumed and requires careful consideration”.
At a minimum, routine emissions reporting should include details about the ratio of estimated versus reported carbon data, a summary of estimation methods and model specifications, and disclosure of any standardisation or reported data.
Mind the disclosure gaps
Emissions reporting standards and frameworks, such as the sustainability disclosure platform CDP and the Task Force on Climate-related Financial Disclosures (TCFD), are increasingly widely used to communicate corporates’ CO2 output, as well as investor-backed assessments such as the Net Zero Company Benchmark, conducted by Climate Action 100+. Such initiatives encourage companies to disclose emissions data, but more work is required to address the material disclosure gap.
“Though some contend that this disclosure gap is narrowing, our research suggests that it is persistent, with recent progress incremental at most,” said the paper.
FTSE Russell said of the 4,000 large and mid-sized constituents of the FTSE All World index, more than half currently disclose operational emissions data. But 42% of large and mid-caps globally still do not disclose both Scope 1 and 2 emissions, including high-profile “mega caps” such as Tesla, Berkshire Hathaway, and Moderna.
Larger companies are “far more likely to disclose”, with more than two thirds reporting their operational emissions versus only half of mid-caps.
Regional and sectoral differences are pronounced, said FTSE Russell – 89% of companies in developed Europe report, compared to around 23% of Chinese companies overall. Despite the planned mandatory reporting requirements in the US, only 53% of companies in the Russell 1000 and 10% in the Russell 2000 report.
Sector-wise, disclosure rates in industries such as technology and healthcare “significantly lag” the telecoms, utilities, and oil and gas sectors.
Only incremental progress has been made in closing these disclosure gaps, the paper said, with “non-disclosing” companies added to portfolios more quickly than the rate of disclosure, because sustainable investment strategies are now being applied more broadly across regions and smaller firms with lower disclosure rates.
In the UK, where disclosure is mandatory, the gap has “closed markedly”, said the paper. Introduction of mandatory reporting for large listed UK firms in 2013 increased the emissions disclosure rate in the UK significantly. With TCFD-based reporting requirements effective in April, nearly all companies in the FTSE 100 disclose material carbon emissions and the UK returns the highest disclosure rate for large and mid-cap stocks in aggregate.
“These findings further underline the case for urgent mandatory economy-wide disclosure to provide investors with the emissions data they require to transition their portfolios,” said the paper.
Inconsistent emissions estimates
Due to persistent disclosure gaps, FTSE Russell said an estimation gap had emerged in the absence of universally and consistently reported corporate emissions. Investors are routinely forced to revert to estimated emissions data to close the disclosure gap and drive investment decisions, it said. “Such estimates are used alongside reported data to assess individual companies and to footprint portfolios, often without distinction or communication of associated uncertainty ranges,” said the paper.
FTSE Russell said there were four challenges in estimation, including the lack of industry or scientific consensus on the best estimations for imputing carbon emissions and the low predictive power of the resulting estimates. Other challenges are the material divergence of estimates, which can sway results for large, diversified portfolios, and limited opportunities to systematically improve the quality of estimates because of the heterogeneity of firms, high variability of observed carbon intensities, and sample size restrictions.
There is no straightforward approach to overcoming these challenges, according to FTSE Russell. Fundamental improvements “would ultimately require additional data such as granular breakdowns of firm activities or production technologies”.
However, the firm says there is potential to develop improve estimation strategies combining the strengths of several existing methodologies. It also introduced a new FTSE Russell carbon emission dataset for around 10,000 companies based on a hierarchical, multi-model approach which it argues will provide improved accuracy and reduce the risk of underestimating emissions.