Inconsistent portrayal of emissions driven by bias in accounting practices
In the race towards a low-carbon future, the focus on decarbonization pathways and Paris alignment has become a key aspect of corporate strategy. These strategic plans outline how organisations aim to reduce greenhouse gas emissions over time, in line with the Paris Agreement's temperature goals.
The Task Force on Climate-related Financial Disclosures (TCFD) has emerged as the standard for measuring and disclosing emissions. TCFD reporting primarily focuses on the transparent disclosure of climate-related governance, strategy, risk management, and metrics/targets, including Scope 1 (direct emissions from owned or controlled sources) and Scope 2 (indirect emissions from purchased energy) emissions.
The TCFD framework encourages organisations to disclose how they manage and reduce these emissions as part of their climate strategy and risk disclosures. This enables investors to assess climate-related financial risks and opportunities accurately. Real-world implementation involves boards assuming climate risk oversight, integrating climate into governance documents, and involving cross-functional teams for scenario analysis and emissions measurement aligned with TCFD’s four pillars: Governance, Strategy, Risk Management, and Metrics and Targets.
However, the accuracy of "low carbon" claims by issuers, asset managers, and external evaluators such as MSCI or Sustainalytics is under scrutiny. These claims are evaluated based on adherence to credible decarbonization pathways and verified emissions data, particularly Scope 1 and 2 emissions. Challenges remain in comparability and consistency, with third-party ESG ratings and evaluations using reported data, scenario analyses, and methodology assumptions to rate climate risk and alignment.
In the oil & gas and minerals and mining industries, where joint ventures (JVs) are common, restricting Scope 1 & 2 reporting to "operated assets" reflects one accounting treatment, not the full extent of a company's operations. For instance, Shell's aggregate Scope 1 & 2 emissions, including JVs and associates, are roughly 1.5 times those from only its owned/directly operated assets.
To find Shell's emissions more holistically using the equity method, one must go to the investor relations website, download a supplementary information file, and find the data. Similarly, if all companies do not agree to include assets over which they exert significant influence, but do not control outright, the gap between GHG figures for equity accounting vs. directly owned and operated assets will remain wide, making it hard to rely on any of their decarbonisation claims.
Recent developments show a shift towards more comprehensive emissions reporting. European energy majors Equinor, Eni, and BP now report emissions reflecting all operations, whether controlled or not. Chevron, on the other hand, uses its influence to make non-controlled JVs and associates adopt reporting and efficiency goals similar to its own. Engagement with Shell and other issuers continues around TCFD disclosure based on the equity method of presentation, with the goal of including assets over which they exert significant influence, but do not control outright.
As we approach 2030, questions about progress are multiplying. Understanding both the numbers and what they do not represent is crucial for assessing the accuracy and comparability of climate claims by companies and evaluators in the financial sector. Regulatory pushes, evolving standards (like the UK Sustainability Reporting Standards), and improvements in disclosure quality will help ensure greater accuracy and comparability in the coming years.
- The Task Force on Climate-related Financial Disclosures (TCFD) encourages companies to report their Scope 1 and 2 emissions holistically, including those from joint ventures and associates, as part of their climate strategy.
- The accuracy of low-carbon claims by companies is under scrutiny, with the TCFD framework emphasizing the need for credible decarbonization pathways and verified emissions data.
- In the financial sector, comparing climate claims among companies can be challenging due to differences in data reporting, specifically regarding assets over which a company exerts significant influence but does not control outright.
