Study recommends changes in methodology around calculating and presenting Scope 2 emissions data to combat poor quality.
A study analysing the greenhouse gas (GHG) emission reports and climate targets of 920 large companies found many at the vanguard are making poor quality submissions especially for Scope 2, potentially thwarting investor efforts to monitor and reduce climate risks.
Trove Research’s report, ‘Improving the quality of corporate climate reporting – an analysis of over 900 companies’ – showed many companies that had made net zero commitments were disclosing inconsistent information on their emissions.
The research pointed at Scope 2 reporting as a major area of concern. It recommended companies make their approach to calculating Scope 2 emissions clear, so it is identifiable when reading the headline Scope 2 emissions. It added they should provide two sets of emissions figures using both Scope 2 approaches – location-based and market-based, which Trove said, would allow easier comparisons between companies and to observe how a company’s emissions performance changes over time. This could be important for investors to understand levels of compliance and emissions targets.
Scope 2 emissions refer to the company’s indirect emissions from the consumption of purchased electricity. Both the Task Force on Climate-Related Financial Disclosures and the GHG Protocol requires reporting Scope 1 and 2 emissions, but Scope 3 emissions are discretionary. The Science Based Targets initiative (SBTi) requires Scope 3 emissions to be reported and included a company’s net zero target. Investors require accurate information on all three scopes in order to calculate and report their own Scope 3 emissions and to pursue net-zero investment strategies in line with the objectives of the Paris Agreement.
“While many companies are trying to do the right thing, lots are falling short of providing information in a way that enables stakeholders to understand the risks companies are facing, and the level of ambition and performance in relation to their climate targets,” said Trove in a statement on the report.
The companies reviewed included those with net zero targets validated under the Science Based Targets initiative (SBTi) and those with net zero commitments outside of the SBTi, such as oil and gas companies, with these figures taken from Trove’s database.
The study included over 300 service companies, 126 from the manufacturing sector, 86 retail firms, 85 from the infrastructure sector, and over 200 more from apparel, biotech, healthcare & pharma, food, beverage & agriculture, fossil fuels, hospitality, materials, power generation, and transportation services.
Lack of focus in reporting was highlighted by the study. According to Trove, 40% of firms do not present baseline emissions data or disclose the base year but omit the associated data.
The report also noted that the presentation of data did not aid comparison by investors. “Sustainability reports often contain infographics to present emissions data in an interpretable and user-friendly format. Whilst the routine use of infographics can be helpful to illustrate the broader context, we have found that visual representations are used in place of clear, numerical values,” it said.
According to the report, Scope 3 emissions accounted for nearly 90% of emissions from the companies. “The dominance of Scope 3 emissions reflects the significant role supply chain emissions play in corporate emissions reporting,” it said.
“When disclosing carbon emissions data, companies are advised to follow a standardised framework, such as the Greenhouse Gas (GHG) Protocol,” it said. However, many companies either do not follow the recommended processes or omit information to enable meaningful comparison over time and between companies.
Other recommendations included working within sectors to agree on common reporting boundaries, especially concerning ownership structures and only refer to “science-based” targets where they are endorsed by the SBTi.
Companies should also be “as explicit about the boundaries and assumptions used when reporting Scope 3 emissions,” Trove added. Reports should highlight any changes in boundaries and assumptions from one year to the next, showing uncertainties in Scope 3 estimates and collaborating with other firms in the same sector to harmonise approaches to Scope 3 emission estimates, the study said.
“Stakeholders demand consistency and completeness in how targets and emissions are presented,” said Guy Turner, CEO of Trove Research. “This report shows that there are several areas where companies can improve. Often these do not require huge effort, but if addressed could significantly change how emissions reports are used.”