Abstract
Increasingly, focus has been set on corporate’s climate change mitigation performance and how companies report on their achievements: investors and the wider public are using information on corporate Greenhouse Gas (GHG) emissions and whether “science-based” targets have been set. Especially the decarbonization of companies’ own operations and therefore reducing “Scope 1 and 2” GHG emissions are in focus.
The methods companies use for accounting for their Scope 2 emissions can have a significant impact on their published data. This study provides an in-depth analysis of the accounting and reporting practices of Scope 2 emissions of 48 European companies in the chemical and pharmaceutical industry with validated near-term science-based targets.
From a GHG emission disclosure perspective, the analysis shows that only a fraction of companies discloses consistent data in line with the globally used accounting standard of the Greenhouse Gas Protocol. This study provides a set of factors which explain possible differences amongst companies’ reporting practices and sets out to explore reasons for managerial decisions to report and account in a certain way. The study finds that the role of a functioning corporate governance mechanism and setting a long-term science-based net zero target both lead to a more consistent and complete reporting of GHG emission and energy data. Moreover, the study also derives the hypothesis that an SBTi commitment has generally led to a paradigm shift within companies, both leading to a higher transparency of GHG emissions and implementing more renewable electricity measures.
Comparisons of developments of Scope 1, Scope 2 market-based, and Scope 2 location-based GHG emissions imply that companies have focused almost exclusively on decarbonizing their scope 2 emissions, whilst Scope 1 reductions, e.g., through converting natural gas, cannot generally be observed. In an in-depth review of different renewable electricity instruments used for Scope 2 accounting, the findings show that it is not sufficient for company valuations or ESG rating to look only for information on Scope 1 and 2 GHG emission reductions or a validated SBT. Instead, considering other information on renewable electricity purchasing, e.g. the implementation of an additionality criteria for market-based instruments, is valuable to assess whether a company has embarked on a climate transformation path instead of reporting large and fast emission reductions.