Focus: For investors, green companies still hard to find with new emissions reporting rules

Voya Financial

02/08/2023 06:00

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      New rules make thousands more companies disclose data
    

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      Boards allowed flexibility when calculating emissions
    

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      Regulators expect comparability to improve over time
    

  
    By Simon Jessop and Huw Jones
       LONDON, Aug 2 (Reuters) - Is Ford  F.N  doing a better
job of cutting emissions than rival Toyota  7203.T ? Is BP
 BP.L  greener than Shell  SHEL.L ? 
    For investors looking to weed out climate laggards from
portfolios, these are vital questions but existing guidelines on
emissions reporting and 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 and the
guidelines will form part of the framework for compulsory EU
standards set to take effect next year.
    The United States is on track to announce similar rules this
year and the corporate standard, first launched in 2001 and
revised in 2004, is also embedded in other international
emissions reporting standards.
    But the guidelines, which are overseen by the World Business
Council for Sustainable Development and World Resources
Institute, define the three main categories of emissions
companies should report broadly, leaving plenty of room for
interpretation. 
    Half a dozen investors interviewed by Reuters said while the
GHGP has been crucial in shining a light on corporate emissions,
it can be hard to compare companies given the potential for
differences in disclosures, and this will remain the case to
some extent 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.
    LIFETIME EMISSIONS
    Take the autos sector. 
    Although 20 of the top 30 automakers report emissions linked
to their supply chains – known as Scope 3 under the protocol -
analysis by research firm Signal Climate Analytics (SCA) seen by
Reuters showed a range of approaches in how they disclose the
data and for 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
kilometre driven.
    That makes comparisons problematic. An unrealistically low
lifetime figure could make cars appear less polluting than they
really are, SCA Executive Chairman David Lubin said.
    In its 2021 public submission to CDP – a non-profit that
runs the global disclosure system on environmental impacts for
investors, companies and governments - Japanese carmaker Subaru
 7270.T  said its cars run for 130,000 km (80,000 miles) over
their lifetime. In 2022, it did not disclose a figure. 
    A search of the British version of second-hand car site
AutoTrader on July 31 showed 988 Subarus for sale, of which 263,
or a quarter, had done at least 80,000 miles.
    Subaru told Reuters the 130,000 km figure referred to
vehicles sold in Japan. For the EU, it used 162,500 km and for
North America, where it books most of its sales, 228,800 km,
information it has not previously made public. 
    A spokesperson said Subaru did not include a lifetime number
in its 2022 disclosure because it wanted to avoid confusion with
an incomplete description.
    "We now believe it's better to disclose the lifetime
distance assumptions by region in our next disclosure (2023)."
    APPLES AND ORANGES 
    Experts said Scope 3 emissions were the hardest of the three
areas to assess as companies have to rely on data from customers
and suppliers for their calculations.
    SCA's Lubin said Scope 3 data was quite limited in its
usefulness without researching how firms come up with their
numbers and how reasonable the assumptions underpinning their
data are.
    Nonetheless, many investors scrutinise carbon emissions data
to gauge how polluting a company is, how it compares with rivals
and how this might affect its bottom line and share price.
    For Laura Kane, head of ESG research at Voya Investment
Management, which is part of Voya Financial  VOYA.N  and
oversees about $323 billion in assets, in many cases, it's like
comparing apples to oranges.
    Kane said her firm buys third-party data from ratings
providers, which aim to normalise and score the data, making it
more comparable across sectors, yet this brings its own
challenges. She declined to name the providers.
    "There is quite a bit of variation among providers ... due
to inconsistent reporting from companies, as well as 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, experts say.
    
    PATCHWORK OF RULES
    The EU has made carbon disclosures mandatory for about
50,000 companies operating in the bloc from next year while new
U.S. rules should come this year as governments look to replace
a patchwork of private sector norms with binding rules, making
it easier to crack down on greenwashing or exaggerated
climate-friendly claims by companies.   
    The International Sustainability Standards Board (ISSB), a
standards-setter established by the IFRS Foundation that
produces international accounting norms, has also approved rules
any country can adopt. Some countries, including Britain, have
said those guidelines will become mandatory.
    Jimmy Jia, researcher at the Oxford Smith School of
Enterprise and the Environment, said as well as differences in
defining what should be counted under existing GHGP guidelines,
companies may use different calculation processes or present
data in different ways.
    "Investors need to understand if a difference is due to an
operational difference, or because the entities applied
different accounting methodologies," said Jia said, co-author of
a study on emissions data comparability.
    Another area of investor concern is how companies account
for their own energy use, or Scope 2 emissions. 
    The GHGP allows companies to buy green energy to offset
their emissions, using contractual instruments such as renewable
energy certificates, and reflect this in their reporting. 
    But the protocol also allows different accounting methods -
market-based or location-based - to be used when companies
calculate Scope 2 numbers. The market-based approach, however,
may not accurately reflect how used energy was generated,
potentially resulting in investors concluding a company is less
polluting than it is, some investors said.
    "Market-based methods open up the door to creative
accounting," British asset manager abrdn said in its response to
a GHGP consultation that closed on March 14.
    Of 8,400 companies to report data globally to CDP, 70%
reported Scope 2 data, with 31% giving both market and
location-based figures, 33% only a location-based number and 6%
just market-based, CDP data shared with Reuters showed.
    CONSULTATION ON CHANGES 
    European and U.S. regulators and officials at the ISSB
interviewed by Reuters acknowledge the criticisms of GHGP but
argue that the new EU, U.S. and global standards are just the
start of a journey to more accurate reporting. 
    Best-practice, pressure from markets, and peers, along with
bespoke sector disclosures, will emerge over the next five years
or so to improve accuracy, as will countries requiring
disclosures to be independently audited, as they do for
financial reports, regulators say.
    A spokesperson for the U.S. Securities and Exchange
Commission declined to comment. 
    Pedro Faria, environmental leader at EFRAG, the EU body that
drafted the bloc's disclosure standards, said the priority was
to make disclosures mandatory before improving the quality, and
that they are just one piece of the puzzle.
    "Ultimately, the thing that you need from (companies) is the
big chunk of emissions and yes, there are methodological issues
there, but also their investments, their transition plans,
changes in strategy, and some of those aspects are even more
important than precise carbon numbers," Faria said.
    The GHGP's consultation on possible changes to its framework
drew over 230 proposals, of which 150 were made public while the
others requested privacy. Any changes would likely take effect
from 2025, at the earliest, according to GHGP. 
    "All feedback shared during that process will be reviewed by
GHG Protocol including its Technical Working Groups and will
inform the scope and potential approaches to make updates to
existing standards or development of additional guidance," said
Pankaj Bhatia, director of GHG Protocol.

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GHG Protocol graphic    https://tmsnrt.rs/3MnxXbc
Signal Climate Analytics graphic    https://tmsnrt.rs/434nYy3
The dearth of emissions data graphic    https://tmsnrt.rs/3PSRTpF
US Republican lawmakers slam SEC chair on 'rushed' rulemaking   
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New rules aim to clamp down on corporate greenwashing   
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EU company ESG disclosure rules set to be eased     urn:newsml:reuters.com:*:nL8N37T35C
EU confirms watering down of corporate sustainability
disclosures     urn:newsml:reuters.com:*:nL8N39H4QN
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 (Additional reporting by Douglas Gillison; Graphics by Sumanta
Sen; Editing by Dan Flynn and David Clarke)
 ((simon.jessop@thomsonreuters.com; +44 (0) 207 542 5052;
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