Corporations Underreporting Carbon Footprints, Study Finds

A recent study published in the journal PLOS Climate reveals alarming findings regarding the reporting practices of corporations in relation to their carbon footprints. The research suggests that most companies are not fully disclosing the extent of their greenhouse gas emissions, particularly in Scope 3 key categories. These findings raise concerns about the credibility of many companies’ claims to be environmentally conscious and “green.”

While reporting on carbon emissions is currently voluntary for most organizations, corporations face mounting pressure from various stakeholders, including investors, regulators, politicians, and non-profit organizations, to disclose and reduce their greenhouse gas emissions. The widely adopted standard for greenhouse gas accounting, the Greenhouse Gas Protocol, includes three levels of reporting. The first level measures emissions directly produced by a company during its business activities. The second level measures emissions associated with the production of energy purchased from external suppliers. However, it is the third level, known as Scope 3, that appears to be consistently underreported and is of utmost importance.

Scope 3 emissions encompass all indirect emissions not previously accounted for, including upstream and downstream emissions throughout a company’s value chain. Upstream emissions refer to those produced in the manufacture of a company’s equipment, while downstream emissions result from customers’ use of a company’s products. Unfortunately, Scope 3 emissions, which contribute the largest proportion to a company’s total emissions, are often overlooked in reporting practices.

Griffith University’s Professor Ivan Diaz-Rainey, an expert in climate and sustainable finance, stresses the significance of Scope 3 reporting, emphasizing that it plays a crucial role in uncovering the true impact of companies’ activities. Diaz-Rainey points out that companies tend to prioritize reporting on their Scope 1 and 2 emissions due to the direct financial benefits associated with energy efficiency improvements. However, this overlooks the downstream emissions caused by customers using the company’s products, which ultimately have a far greater impact.

An oil and gas company serves as a prime example. While they may diligently report on their own emissions resulting from the extraction and production processes, they often fail to account for the emissions generated by end-users when using their products. Diaz-Rainey highlights that this incomplete reporting obscures the true environmental impact of the company’s operations. He also notes that banks providing significant loans to fossil fuel projects would have equally substantial Scope 3 emissions.

The research highlights the need for mandatory disclosure of Scope 3 emissions, echoing the growing calls from various jurisdictions and the Task Force on Climate-Related Financial Disclosures (TCFD). Diaz-Rainey suggests that if reporting on Scope 3 emissions was compulsory, it could significantly improve transparency and accountability among corporations.

The study, a collaboration between climate risk analysis firm EMMI, Griffith University, and the University of Otago, employs a machine learning approach to estimate Scope 3 emissions. Lead researcher Dr. Quyen Nguyen explains that this innovative method provides insights into which categories of Scope 3 emissions are commonly reported and which are frequently ignored. The findings indicate that companies tend to prioritize reporting on easier-to-calculate categories, rather than those that truly matter, such as emissions resulting from the use of sold products.

As governments and regulators seek to address climate change and promote more sustainable practices, it is crucial to focus on improving disclosure and reporting standards. The study’s use of machine learning to estimate Scope 3 emissions suggests that policymakers and regulators should concentrate their efforts on enhancing disclosure in critical categories that have been systematically neglected.

The study sheds light on a significant issue among corporations: the underreporting of Scope 3 emissions. The inadequate reporting practices not only diminish the transparency and credibility of companies’ claims to be environmentally responsible but also hinder effective action against climate change. Urgent steps need to be taken to ensure mandatory disclosure of Scope 3 emissions, emphasizing the importance of a comprehensive accounting framework that covers all facets of a company’s carbon footprint. Only through greater transparency can we accurately assess the environmental impact of corporations and spur the necessary actions to address climate change.