Corporate reporting on Scope 3 indirect emissions falls far short of the standards that fund managers need to comply with for the European Union's Sustainable Finance Disclosure Regulation when it is introduced early next year, according to research by European credit ratings agency Scope Ratings.
Scope analysed companies in Germany’s DAX 40 Index and found that seven companies have not reported on Scope 3 emissions at all and fewer than half of the companies are reporting on key Scope 3 metrics.
“There is a huge gap between companies and their ambition to report across Scope 3 categories,” said Bernhard Bartels, a managing director at Scope ESG Analysis.
The results of the research on Germany’s top companies could point to a similar – or even more alarming – Scope 3 reporting issue across Europe, one that could be even more pronounced among midcaps or SMEs .
"If the largest listed entities are not supplying this information, what hope is there for asset managers investing in start-ups with limited resources?" said Phil Spyropoulos, a financial services partner at law firm Eversheds Sutherland.
Spyropoulos was not referring to specific companies, but companies that do not currently report Scope 3 include sporting goods manufacturer Adidas, Daimler Truck Holding, healthcare group Fresenius and laboratories supply company Sartorius.
Tyremaker Continental, chemicals company BASF, Deutsche Bank and pharmaceutical giant Bayer have the most detailed Scope 3 reporting, while aerospace company Airbus and industrial manufacturer Siemens report the highest Scope 3 emissions.
Less than 50% of the companies have reported on "sold products" and only 26 of the 40 companies provide information on emissions in "purchased goods and services". These two metrics are the most important categories of Scope 3 reporting, according to the Greenhouse Gas Emissions protocol.
“You need to have an idea about what is the ingredient in terms of embodied CO2 emissions and for more than half of companies that is not available,” Bartels said.
Scope 3 emissions are indirect and cover emissions in companies’ value chains, including supply chains. Scope 1 and 2 cover direct and indirect emissions that companies make in their own operations.
The issue is increasingly in focus as Scope 3 emissions are central to the recommendations of the Task Force on Climate-related Financial Disclosures and to the climate-related risk disclosures US companies will have to make from 2023 if an SEC proposal is passed in December.
Big problem
The problem of inconsistent Scope 3 reporting is accentuated for fund managers due to a timing mismatch between the implementation of two sets of EU regulations: the SFDR and the Corporate Sustainability Reporting Directive.
Regulatory technical standards will apply from January 1 2023 under SFDR that require asset managers to disclose the principle adverse impacts and sustainability features of their products by June 30 2023. Larger companies, however, will only start to report in 2025 on 2024 figures under CSRD.
This will make 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,” Scope Ratings said.
Fund managers are having to push ahead with data gathering regardless and are relying on data providers to supply the little available reported information that corporates have already disclosed.
“I do think we face a period in which there is quite a lot of uncertainty regarding Scope 3 because many portfolios will be put together based on data that are not the best and sometimes estimates may be used,” Bartels said.
Spyropoulos agrees. "Asset managers are going to have to use fairly crude estimates and proxies to comply with their obligations," he said.
Crucial data
Scope 3 emissions typically make up the bulk of emissions for most sectors, particularly for high-emitting companies, and are crucial for investors to assess the sustainability of a company’s business model.
The issue is particularly pressing for the financial sector, which relies on its corporate clients for data to calculate its financed emissions. Scope found that banks and insurance companies are least likely to report Scope 3 information.
Insurer Allianz and Deutsche report on Scope 3 from investments or the volume of financed emissions but the reporting scope is limited and only includes loans to carbon-intensive sectors, which in Deutsche’s case is 10% of total assets.
None of the financial institutions has a quantifiable reduction target for financed emissions that encompasses all of their investments, Scope said.
“Scope 3 reporting from financials is not satisfactory at all,” Bartels said. “Having one commonly accepted methodology for how to report on Scope 3 emissions would certainly be a big leap forward but we are not there yet."
Refiled story: Adds clarification in sixth paragraph