Corporates are making patchy progress on the disclosure of their carbon emissions, writes Elisabeth Jeffries. Mandatory disclosure would be a struggle for many

A UK move to make companies report their greenhouse gas emissions could mark a significant milestone in green accounting. The UK government, which is obliged to consider the issue under the terms of the previous administration’s Climate Change Act, passed in 2008, has proposed a number of new rules. These include the use of a reporting standard, obligatory reporting for all large or quoted companies, companies that consume large amounts of energy, and obligatory verification.

If it gives the green light, UK companies would be the first in the world to be held accountable on carbon pollution. True, hundreds of companies across the globe have published emissions data of their own accord, or through the voluntary Carbon Disclosure Project (CDP), a campaign that gives brownie points to the most transparent corporations.

But the information is often patchy and unreliable and put together in an amateurish way.
According to Stefano Dell-Aringa, research manager at Trucost: “There are some very junior mistakes and a lack of attention.” Dell-Aringa and his team spend their time analysing corporate data of this type, studying thousands of company reports.

Their investigations reveal some major errors among big emitters. For example, the company reported that the German utility RWE had in 2009 overstated its own carbon dioxide (CO2) emissions by 70m tonnes - equivalent to the annual greenhouse gas emissions of Denmark - because of a classification error. Research by Trucost also reveals an airline reporting sulphur dioxide (SO2) emissions higher than the whole of the EU at 6,421,000 tonnes in 2005. It got the zeros wrong, reporting a less surprising figure a year later of 6,856 tonnes.

Trucost has also drawn attention to a mix-up at a major cement company, which in 2008 confused SO2 with the greenhouse gas nitrous oxide (NOx), switching the figures the wrong way round. Aside from clerical errors and ignorance about pollutants, it is also easy to understate emissions.

One UK company reported a 25% emissions reduction from freight transport over a three year period, comparing CO2 tonnage per £m sales. But of course if the company’s sales increased significantly, this figure might well drop. “It happens very often that companies, just to look better, disclose their environmental performances normalised by revenue, employee or floor space. In this way, it might seem that performances improved even if absolute emission increased over the years,” points out Dell-Aringa. Errors, he says, are made because of “a lack of internal quality checks… Among companies that do not disclose environmental information, some can’t be bothered and some have no idea.”

There are more companies whose disclosures are a cause for concern. The carbon footprint of an African telecommunications company showed an extraordinary increase from one year to the next, climbing 260% from 2009 to 2010. The increase was due to a revised view of what should be included in the company’s own direct emissions (known as scope 1) rather than its energy supplier (scope 2) or its supply chain (scope 3). Changes like these have been common among many companies, especially when they start dealing with the issue, but also because widespread controversies about issues like scope 3 emissions have not been resolved so that data are not always easy to compare between companies.

Some companies do have to report some emissions, such as those in the European Emissions Trading scheme (EU ETS); so far these are heavy emitters like utilities and mining companies. These corporations are already obliged to provide some information on individual facilities. At the same time, the UK requires some lower emitters, such as those in the service sector, to provide relevant information. Nonetheless, this leaves huge gaps.

“Even the mandatory data is incomplete and time consuming to find - you have to cross check centralised EU sources with company reports” says Craig Mackenzie, sustainability director at Scottish Widows Investment Partnership. Data on individual production facilities within the EU do not include the whole of the company’s EU operations. More significantly for companies with worldwide operations, data concerning corporate emissions overseas may be left out altogether, meaning equity research and other analysts have to resort to their own estimates.

The outcome is that many investment decisions using ESG criteria are founded on unreliable data. Yet Mackenzie argues the issue is growing in importance, due to new policies planned in South Africa, Australia, Brazil and other places, which will have an impact on corporate liabilities and costs. “We need to put a price on carbon emissions in sectors materially affected,” he states. The price can take the form of a carbon tax, or a carbon emissions cap, but Mackenzie indicates many companies are ignoring this issue and not producing assumptions about the future carbon price.

“We may be relying on inaccurate data; we routinely make assumptions about how things will turn out. If a company publishes emissions today, it needs to project forward the future cost of carbon - we need an accurate starting point for benchmarking,” he says.

Mandatory reporting across the board would help eliminate some of these problems, since they would probably be accompanied by verification rules. “In a mandatory context, where there are fines for unreliable reporting, you would expect this problem to become rarer,” says Mackenzie. At the same time, mandatory reporting would also mean the use of a single reporting standard, creating more consistency and improving the ability to compare across a particular industry.

Because of this problem, many companies with strong carbon policies have been campaigning for mandatory reporting, as have major business and financial organisations such as ACCA and the CBI. Francesca Peschier, senior manager of corporate reputation at insurance company Aviva, says there is a real opportunity for insurers to use their investor power to invest in opportunities that reduce global climate risk: “We need to balance our long-term liabilities with long-term returns. This is why we have been supporting a mandatory requirement for large companies to report on their greenhouse gas emissions. We believe that where carbon emissions are a material commodity with a financial value, they should be properly defined, measured, accounted for, audited and reported,” she says.

Many major consumer products companies have been reporting this for years, like Nestlé - which joined the CDP in 2002. Given the present public scepticism of both companies and governments, blue chip companies such as these use environmental policies to promote brand trust and want to make sure the public are aware of it. Many of these powerful organisations are in favour of legislation.

Yet given the dominance of environmental concerns in major EU economies like Germany, it is perhaps surprising that the UK should be the first to consider mandatory reporting of greenhouse gases. Some countries have introduced some similar rules, such as Denmark, which has a Corporate Social Responsibility (CSR) reporting requirement, but nothing as specific as what is proposed.

The size of the UK’s financial sector probably explains this. “The UK has always been a bit ahead on certain issues, such as corporate governance frameworks that pre-date most measures in other EU countries,” says Anders Nordheim, research director at Eurosif, pointing out that the investment lobby groups in most other EU countries are more fragmented.

“It is perhaps more challenging to regulate corporate behaviour on an EU level than certain other areas due to the very different cultures and corporate legal environments across member states. Therefore, the EC tends to set frameworks or minimum standards that national governments can exceed if they wish in certain circumstances,” he states. Nonetheless, broader moves are in the wings, not least the European Commission’s pending legislation on CSR reporting.

How likely is mandatory greenhouse gas emissions reporting? The big cheeses in support of the new regime could sway the government in favour. If there is a delay, the science behind the policy - accepted in most European countries - suggests both the climate risks and carbon liabilities will put it back on the agenda eventually.

Companies reporting to shareholders need to be prepared for a potential change in the law that could require some of them to address the issue for the first time. “For a lot of companies [mandatory reporting] would be quite a struggle. But it would be a very good initial step,” says Stefano Dell-Aringa. Of course, it would not solve everything; there are plenty who will always claim environmental issues are not material to their business.