Inconsistent emissions data could be misleading or inaccurate
In the race to reduce greenhouse gas emissions and align with global climate goals, companies and financial institutions are increasingly focusing on decarbonization strategies and Paris alignment. However, a closer look at emissions reporting reveals that the focus on Scope 1 and 2 decarbonisation pathways may not tell the full story.
**Decarbonization Pathways**
Decarbonization pathways refer to strategic plans implemented by organizations to reduce their greenhouse gas (GHG) emissions over time, with the aim of aligning with global climate goals set by the Paris Agreement. Companies set specific GHG emissions reduction targets, invest in low-carbon technologies, and engage with stakeholders to ensure their decarbonization plans are inclusive and effective.
**Paris Alignment**
Paris alignment involves ensuring that business strategies, investment portfolios, and financial products are consistent with the goals of the Paris Agreement. This requires assessing resilience under different climate scenarios, integrating climate risk management into governance structures, and reporting on progress towards Paris alignment through frameworks like the Task Force on Climate-related Financial Disclosures (TCFD).
**Real-World Implementation**
Companies like GE Aerospace issue detailed reports outlining their decarbonization strategies, while asset managers assess their investment portfolios for alignment with Paris goals. External evaluators like MSCI and Sustainalytics provide assessments of companies' climate-related performance and risk exposure, helping investors evaluate the climate alignment of potential investments.
However, the focus on Scope 1 and 2 decarbonisation pathways only tells a small part of the story. Many operators exclude joint ventures (JVs) and other partly owned associates from their reported Scope 1 and 2 emissions, leading to a gap between GHG figures for equity accounting vs. directly owned and operated assets.
For instance, Shell highlights figures for its owned and operated assets in its glossy Energy Transition Strategy document, while omitting a material share of JVs and other associations from its net zero targets. Financial contributions from JVs and other associates are usually not included in emissions disclosure, even though they are included using the "equity method" for accounting purposes.
Some companies, such as European Energy majors Equinor, Eni, and BP, now report emissions reflecting all operations, whether controlled or not, in response to engagement by investment managers. This holistic approach provides a more accurate picture of a company's carbon footprint.
In the oil and gas industry, where JVs are common practice, restricting Scope 1 and 2 reporting to "operated" assets does not reflect the reality of how a company operates. Companies like Chevron use their influence to make non-controlled JVs and associates adopt reporting and efficiency goals similar to their own.
As we approach 2030, questions about progress towards net zero are increasing. With only five years remaining, it is crucial that emissions reporting becomes more transparent and inclusive, providing a comprehensive view of a company's carbon footprint.
In conclusion, decarbonization pathways and Paris alignment are essential components in climate-related financial disclosures. However, the focus on generating lots of numbers, jargon, and reports may be displacing the focus on real-world change. It is crucial that companies and financial institutions provide clear and accurate emissions reporting, including Scope 3 emissions, to ensure that stakeholders have a comprehensive understanding of a company's carbon footprint and its progress towards net zero.
- To ensure a comprehensive understanding of a company's carbon footprint and its progress towards net zero, it's crucial that companies includeScope 3 emissions in their reports, as JVs and associates often contribute significantly to a company's total emissions that are currently omitted from Scope 1 and 2 accounts.
- In the oil and gas industry where joint ventures are common, it's necessary to report emissions reflecting all operations, whether controlled or not, as restricting Scope 1 and 2 reporting to "operated" assets does not offer a holistic or accurate representation of a company's carbon footprint and climate-related performance.
