The difficulties of DAX 40 companies in reporting Scope 3 emissions indicate the testing times ahead for London-listed firms as the deadline for them to publish net zero plans nears
With less than a year to go until all UK-listed companies must publish their net zero plans, the scale of the challenge ahead of them is being indicated by a study showing only half of the companies in Germany’s benchmark DAX 40 companies have reported on more than four categories for indirect or Scope 3 emissions.
The study by Berlin based ratings agency Scope ESG Analysis found that seven DAX 40 companies have not reported on Scope 3 greenhouse gas (GHG) emissions at all. Six have reported on no more than two categories. Fewer than 50% have reported on the most relevant category “use of sold products” and only 26 provide information on the emissions in “purchased goods and services.” In addition, companies use different methodologies to account for their indirect emissions.
There are three categories of Scope emissions, as defined by the GHG Protocol, the most widely used corporate accounting standards for assessing emissions. Scope 1 covers direct emissions from company-owned sources, such as boilers and vehicles, while Scope 2 addresses indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company. These two groups of emissions are largely under organisations’ control and lend themselves to accurate tracking, with most firms likely to have ready access to all the data they need, such as gas and electricity purchases.
The last group of emissions under the GHG Protocol, Scope 3, however, presents a far bigger challenge for corporates and their treasurers. This group aims to address all other indirect impacts from company activity, ranging from the goods it purchases, the suppliers it deals with, to the disposal of the products it sells.
“The pressure on companies globally to report their CO2 emissions is steadily increasing – both through regulation and from investors,” says Bernhard Bartels, managing director at Scope ESG Analysis. “While most companies already comprehensively report their direct or Scope 1 emissions and the Scope 2 emissions from energy consumption, there are major differences in the reporting of indirect or Scope 3 emissions.”
Bartels says the results of the DAX 40 study also reveals that the complexity of capturing Scope 3 emissions varies greatly between industries. “Take banks and insurance companies which rely on the Scope 3 emissions of their borrowers to report their own Scope 3 emissions. Other sectors face the problem of complex and sometimes unstable supply chains that make it difficult to calculate emissions all along the value chain, with the textile industry a good example.” he says.
The struggles of German companies and inconsistencies between them with emissions disclosures are also a headache for fund managers with exposure to EU companies as they are due to start ESG reporting, including indirect or so-called Scope 3 GHG emissions, on their investment portfolios from next year when the EU’s Sustainable Finance Disclosure Regulation (SFDR) comes into force.
Bartels says: “Inconsistent ESG reporting, by no means confined only to Germany’s larger companies, complicates the task for fund managers invested in these companies, make it difficult for consistent decisions when putting together sustainability-linked portfolios,” he says.
While capturing and analysing Scope 3 emissions data are widely acknowledged to be a huge challenge for corporates, the experience of German companies to date on this front shows just how difficult it is going to be for publicly-listed companies worldwide and fund managers to meet stringent new climate reporting requirements, not least in the UK.
By June 2023, UK-listed companies will have to publish net zero transition plans, as will regulated investors who manage more than £50bn in assets or own more than £25bn. Smaller asset managers with at least £5bn under management have until June 2024.
The UK government has already committed to transition the entire financial sector to net zero by 2050 and is aiming for the UK to be the world’s first net zero-aligned financial centre. UK companies’ transition plans will need to set out how they will adapt towards a low-carbon economy. The plans will need to state high-level targets for mitigating climate risk, including greenhouse gas reduction targets and a commitment to net zero with regular milestones.
The plans must also detail actionable steps the company plans to take to achieve those targets and will need to be independently verified and made publicly available.