Investors looking for green, ESG-compliant companies to invest in may still have a hard time finding them, even with new emissions reporting rules from the Greenhouse Gas Protocol (GHGP). The GHGP allows companies to buy green energy to offset their emissions, but it also allows different accounting methods to be used when calculating Scope 2 emissions. This could lead to investors concluding that a company is less polluting than it actually is. Given the potential for differences in disclosures under the GHGP, investors looking for companies that meet their ESG standards have a hard time comparing.
“More companies are disclosing, but at what quality are they actually going to disclose?” said Vanessa Bingle, director at Alpha Financial Markets Consulting, a sustainable investment advisory firm.
Scope for A Clearer ESG Approach
Scope 2 emissions are those that come from the generation of purchased electricity, steam, heat, and cooling. The market-based approach to calculating Scope 2 emissions uses the price of carbon emissions to estimate the emissions from purchased energy. However, this approach may not accurately reflect how the energy was actually generated, which could lead to investors overestimating the environmental benefits of a company.
The location-based approach to calculating Scope 2 emissions, on the other hand, uses the emissions factors for the region where the energy was generated. This approach is more accurate, but it can be more difficult to implement.
Some investor firms buy third-party data from ratings providers in an effort to normalise and score the data and thereby making cross-sector comparisons easier. However, this approach brings its own set of problems and gives big investors with deep pockets a major advantage over smaller investors. Purchasing vast amounts of third-party data as well as teams to assess them is not a viable strategy for smaller players.
The Way Forward for ESG Reporting
The GHGP is working on a new standard for Scope 2 emissions that would use a hybrid approach, combining market-based and location-based methods. This would address the concerns of investors that the market-based approach is not accurate enough. However, experts have admitted that the problem is likely to persist to some degree.
In the meantime, investors should be aware of the limitations of the current GHGP standards for Scope 2 emissions. They should also ask companies about their emissions reporting practices and how they are offsetting their emissions. By doing their due diligence, investors can make more informed decisions about where to put their money.
“Investors need to understand if a difference is due to an operational difference, or because the entities applied different accounting methodologies,” said Jimmy Jia, Oxford Smith researcher and co-author of a study on emissions data comparability.
