Inconsistent representation of pollutant discharge portrays a biased image
In the world of business, annual reports often showcase slick ESG and sustainability reports claiming progress towards decarbonisation goals. However, a closer look at the numbers reveals a more complex reality.
One of the key areas of concern is the reporting of Scope 1 and 2 emissions, which are emissions from operations and energy imported into operations respectively. While these are the most commonly measured, they only tell a small part of the story. Joint ventures (JVs) and other partly owned associates are often excluded from Scope 1 and 2 reporting, despite their contribution to a company's emissions.
For instance, Shell's aggregate Scope 1 and 2 emissions, including JVs and associates, are roughly 1.5 times those from only its owned/directly operated assets. This gap can be significant, and unless all companies agree to include assets over which they exert significant influence but do not control outright, it will remain wide.
To find Shell's emissions more holistically using the equity method, one must go to the investor relations website and download a supplementary information file. This practice of selective reporting can make it challenging to get a clear picture of a company's true emissions footprint.
US energy major Chevron, on the other hand, has been reporting emissions for its owned and JV operations for many years and also reports metrics beyond TCFD emissions, including energy efficiency and water management. Chevron uses its influence to make non-controlled JVs and associates adopt reporting and efficiency goals similar to its own.
The Task Force on Climate-related Financial Disclosures (TCFD) has become the standard for measuring emissions. Yet, Scope 3 emissions, including those from suppliers, customer use of products, and end-of-life recycling or disposal, are not yet systematically counted by most businesses.
The focus on Scope 1 and 2 decarbonisation pathways only tells a small part of the story, and the reported progress may not always be accurate. This is particularly true in industries like oil & gas or minerals and mining, where JVs are common. Restricting Scope 1 and 2 reporting to "operated" assets does not reflect the reality of how a company operates.
For example, Shell and Equinor's plan to combine their North Sea assets into a new JV likely means that Shell's North Sea fields will drop out of the Scope 1 and 2 figures for "operated" assets, potentially undermining its decarbonisation claims.
In real-world terms, decarbonisation pathways are the modeled or planned routes for reducing carbon emissions over time toward net-zero targets. Paris alignment means ensuring these pathways or emissions reductions are consistent with the scientific benchmarks established to meet the Agreement's temperature goals.
Issuers (companies or governments), asset managers, and external evaluators like MSCI or Sustainalytics incorporate decarbonisation pathways and Paris alignment into their strategies. They set science-based targets, implement strategies to reduce emissions consistent with the 1.5°C scenario, and evaluate investments based on carbon footprints, emissions reduction targets, and alignment with net-zero pathways.
Recent progress includes the commitment of asset owners, exemplified by the Net-Zero Asset Owner Alliance, to interim targets such as cutting portfolio emissions by 25-30% by 2025, aligning with IPCC 1.5°C pathways to demonstrate short-term Paris alignment.
Thus, decarbonisation pathways and Paris alignment serve as benchmarks and action frameworks that issuers must integrate into their operational and strategic planning, asset managers embed in portfolio construction and stewardship, and evaluators embed in their assessment methodologies to provide transparency and comparability for capital allocation aligned with climate goals.
As we approach 2030, questions about real-world progress are multiplying. It is crucial for companies to report emissions accurately and comprehensively to ensure transparency and trust in their decarbonisation efforts.
[1] Source: International Energy Agency (IEA) [2] Source: Net-Zero Asset Owner Alliance
- In the world of environmental science, it is crucial to address the limitations of traditional Scope 1 and 2 emissions reporting, as these only offer a partial view of a company's emissions footprint, often excluding contributions from joint ventures and associates.
- The integration of Scope 3 emissions, such as those from suppliers, customer use of products, and end-of-life recycling or disposal, into reported data is essential for a comprehensive understanding of a company's true emissions impact, especially in industries where joint ventures are common.
