The time has come for investors to think about greenhouse-gas emissions separately from other environmental, social and governance criteria.
ESG investing is increasingly popular, but remains hamstrung by its breadth of scope. Not only do the three prongs sometimes point to conflicting priorities, investors don’t necessarily agree which metrics to use and frequently have limited data available. There is often little correlation between different ESG ratings.
One way through the fog is to split greenhouse-gas emissions from the wider pack. With nearly all of the world’s biggest economies planning to decarbonize in an effort to slow global warming, emissions are already starting to affect financial returns and business models across industries. It is also more obvious what needs to be measured than with other ESG metrics.
However, even emissions come with measurement challenges, and corporate disclosure remains patchy. Regulators, central bankers, lenders, investors, auditors and other stakeholders are working in various combinations to develop new reporting standards. Some are focused only on emissions, others on the wider ESG arena.
Five global standard-setting groups collectively published a useful prototype for more emissions-focused reporting in December. Across industries, companies should publish three standardized metrics for greenhouse-gas emissions: scope one, which is emissions from direct operations; scope two, which adds emissions from the energy used in direct operations; and scope three, which covers the full value chain.
The proposal also suggests companies give a description of climate risks and opportunities; figures for low-carbon investment, spending, revenues and cost savings; carbon prices used; any green targets in executives’ incentive plans; and information on governance, strategy and risk management.
The IFRS Foundation, the international accounting standards-setting body, aims to establish a “Sustainability Standards Board” this autumn to set rules. Using December’s prototype as a starting point, it wants to develop a “global baseline” for jurisdictions to endorse.
U.S. officials are also considering the issue, and the European Union has opted for its own standard-setting body. The IFRS’s ambition is to ensure the nationally implemented rules use the same foundation.
chair of the foundation’s task force, expects there to be “enough support to make a convincing start,” but cautions that universal adoption of the global baseline could be “a long process.”
Even with this emissions-focused prototype, there is a risk that progress gets bogged down in debates over what qualifies as low carbon. For example, natural gas is cleaner than coal but does generate emissions. Still, the other metrics in the prototype would be very useful, and some kind of agreement on emissions should be easier to reach than one for wider ESG reporting. There is little consensus on what counts as a social cost, for example.
Emissions data is an imperfect approximation of the risks investors face as economies decarbonize, but many financial metrics such as profit are slippery concepts too. The rules will evolve over time, much like accounting guidelines do. The sooner companies get used to emissions reporting—and investors to factoring it into their analysis—the better.
Write to Rochelle Toplensky at firstname.lastname@example.org
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