- From next year, fund managers will have to report on Scope 3 emissions in their portfolios, according to the Sustainable Finance Disclosure Regulation.
- Five Dax 40 companies, including Adidas, have still not reported on Scope 3 emissions at all.
- Even the Bundesbank skimped on details of its Scope 3 emissions for its first climate report earlier this year.
European companies have long struggled to report carbon emissions comprehensively.
Last year, Capital Monitor reported that although 76% of European corporates had publicly announced targets to cut their emissions, Scope 3 – indirect emissions that occur in a company’s value or supply chain – had effectively been shuffled under the carpet, even though they account for a far larger proportion of overall emissions.
At the time, ratings agency Fitch Ratings revealed that just under a third (32%) of those companies that committed to reducing emissions included Scope 3 within their pledges.
Almost a year on, figures have improved, but not by much. A report from Berlin-headquartered credit ratings provider Scope Group, published in mid-August, makes for grim reading.
Only half of companies in Germany’s benchmark Dax 40 stock market index have reported on more than four of 16 categories of indirect greenhouse gas emissions, and five have not reported on them at all: pharmaceutical and laboratory equipment supplier Sartorius, the two listed arms of healthcare group Fresenius, commercial vehicle manufacturer Daimler Truck and sportswear manufacturer Adidas (see chart below).
The Dax 40 is generally seen as an indicator for the state of the Germany economy and by extension, as the largest economy in Europe, for that of the broader region too.
Sartorius says that Scope 3 emissions are “complex” and require “consideration of numerous interdependencies within the supply chain and requires assumptions to be made”. It has some estimates for 2020 but none for 2021. Fresenius has said it is “continuously assessing its emissions across the entire value chain”, but there is no mention of Scope 3 on its sustainability pages. There is no mention at all of Scope 3 in Daimler Truck’s 2021 sustainability report and although Adidas does intend to reduce emissions across its value chain by 30% by 2030, it takes a 2017 baseline and gives few details on how it will be achieved.
Set up by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) in the 1990s, the GHG Protocol is a global and standard framework to measure and manage greenhouse gas (GHG) emissions.
It is a framework of 15 distinct reporting categories “to measure, manage and reduce emissions across a corporate value chain”. These are purchased goods and services; capital goods; fuel and energy-related activities not included in Scope 1 and 2 (those emissions owned or controlled by a company); upstream transportation; waste generated in operations; business travel; employee commuting; upstream leased assets; downstream transportation; processing of sold products; use of sold products; end-of-life treatment; downstream leased assets; franchises; and investments.
Scope Group has added a 16th category to the list: companies that mention Scope 3 on their websites.
Some sympathy is probably in order, says Bernhard Bartels, group managing director of ESG analysis at Scope Group and lead author of the report. “It’s difficult for the companies to get the information on Scope 3, and, of course, sometimes it’s also not pleasant for [the image of] the company to report such figures.”
Time is running out
But the clock is ticking. The lack of data about Scope 3 is what Bartels calls “a major problem” for fund managers. From next year, within Europe, they will have to report on Scope 3 emissions in their portfolios, according to the Sustainable Finance Disclosure Regulation (SFDR). It remains unlikely that the regulators would impose sanctions at the moment but in the short term it could hamper funds’ abilities to raise capital.
The holes are obvious. It is clear that companies are unwilling to delve into the afterlife of products. Less than half of the Dax 40 has reported on “use of sold products” and only 26 out of 40 provide information on the emissions of products after they have been sold.
But Scope Group sees the lack of consistency in reporting as a more immediate issue.
“Inconsistent ESG reporting, by no means confined only to Germany’s larger companies, makes it hard, if not impossible, for fund managers invested in these companies to comply with the SFDR or make consistent decisions in putting together sustainability-linked portfolios,” the report says.
This is a significant problem. For a start, companies use different methodologies to account for their indirect emissions, which makes it difficult for investors to compare like with like.
Only 50% of the Dax-listed companies give an explicit quantifiable Scope 3 target and the targets themselves differ substantially in size (10-40%), timing (2025-35) and base year (2015-2018).
“If you have a major shift in your business model in one year, that relates to a huge decline in Scope 3, then you probably choose the year before and the year after” explains Bartels, describing it as the “the game being played”.
Here, he mentions oil and gas companies and the automotive sector. They often appear good in terms of Scope 3 reporting because when they invest in renewables or electric cars it “reduces the downstream emissions by a lot”.
The Essen-based energy company RWE and Munich-based car manufacturer BMW are cases in point. The former is changing its business model and investing €50bn in renewables by 2030 while the latter has refocused its production on to electric vehicles.
Financial companies remain a challenge. Bartels refers to them as the “last entity” to report on Scope 3 because “they rely ultimately on the figures of the Dax companies that are not part of the financial sector”.
Although Deutsche Bank is high on the list in terms of disclosures, it has still not published its targets for the carbon footprint of its loan portfolio, for example.
“For many banks, the solution is to focus on fossil fuel investments and leave everything else aside,” Bartels notes.
Kicking the can on Scope 3
The struggle with Scope 3 reporting is not new either in Germany or for its banks.
In early July, the Deutsche Bundesbank published its first climate-related disclosures, which it admitted were of “limited use”. Neither Scope 1 nor Scope 2 emissions include bank-financed GHG emissions while the country’s central bank said that Scope 3 emissions were not being recorded “across the board”.
Indeed, the bank limited the reporting of its Scope 3 emissions to its €10.4bn covered bond portfolio.
“Hey guys, let’s do a climate analysis of bonds on our balance sheet but pretend that we don’t deal with corporate bonds, thus only footprint our covered bond portfolio to come up with a ridiculously low CO2e [CO2 equivalent] number,” was the sarcastic response to the report from Ulf Erlandsson, founder and chief executive of Stockholm-based non-profit think tank Anthropocene Fixed Income Institute (AFII), on Twitter.
“It’s the same thing with the ECB [European Central Bank] climate stress test reports,” says Bartels.
At the beginning of July, the ECB reported that banks face a €70bn hit ($71bn) from climate change.
But this number is low. As ECB Executive Board member Frank Elderson told Bloomberg Television, only 20% of the banks take climate-related variables into account when they make their credit and loan decisions, and proxies are used “much more than direct engagement with clients-based data”.
But where does this leave fund managers and their SFDR requirements?
The answer appears to have been to kick it down the road. The larger companies will have to report their Scope 3 emissions in detail by the 2024 financial year and, as Bartels says, “most of the larger companies are very well aware they need to do it”.
Those that do it well are not doing so to be philanthropic, but rather for commercial advantage. “Sustainable products and technologies offer significant commercial potential as demand and interest in them is rapidly growing among consumers, customers and policymakers,” noted Ariane Reinhart, group head of human relations and sustainability at Continental Tires, in the company’s sustainability report this year. The Hanover-headquartered automotive parts manufacturer is ranked top of the list on disclosures by Scope Group.
For most of them, there has been a “mind shift”, which means it is likely to happen; for others, it will be harder. “They will need to change their business models,” Bartels says.
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