Are current greenhouse gas accounting practices misleading the quest for net zero?

Greenhouse gas (GHG) emissions are a leading cause of climate change, and countries worldwide are taking steps to tackle their emissions. To achieve the goal of net zero, corporates must reduce their emissions to the point where they are offset by the removal of an equivalent amount of greenhouse gases from the atmosphere.

However, new research from S&P Global Ratings has found that current GHG accounting practices can obscure how effectively corporates are contributing to national and international net-zero goals. This makes differentiating climate leaders from the pack difficult.

To support broader climate and net-zero goals, many companies include scope 2 emissions – indirect emissions from the consumption of purchased energy –  in their near-term sustainability strategies, in addition to those generated by their own operations (scope 1).

The report acknowledges that measuring purchased energy emissions can be challenging for companies, as they may not have access to accurate data from their energy suppliers.

This variance makes it difficult to compare performance across companies and determine whether a company’s actions meet broader net-zero goals set at the country level or globally through the Paris Agreement.

However, there are methods to estimate these emissions, such as using market-based or location-based emission factors.

Misleading data

Currently, most emissions are accounted for using the GHG Protocol Corporate Accounting and Reporting Standard. In accordance with the standard, scope 2 emissions should be reported using either the location-based method or both the location- and market-based methods.

Market-based approaches use the carbon intensity of the electricity grid where the company purchases its energy. This method assumes that all companies purchasing energy from the same grid will have the same carbon emissions associated with that energy, regardless of their individual consumption patterns.

Location-based approaches, on the other hand, use the emissions associated with the specific energy source that a company purchases. This method considers the specific energy generation source used by the supplier and the emissions intensity associated with that source.

Both methods have their advantages and limitations. Market-based approaches are simpler and easier to implement, but they do not reflect a company’s individual emissions performance or its ability to influence the emissions intensity of the grid.

Location-based approaches provide a more accurate reflection of a company’s individual emissions, but they can be more complex to calculate and require detailed information about the energy sources used by the supplier.

In practice, companies do not always disclose location-based data in addition to market-based data, or clearly identify which method they have used when reporting emissions. The disclosure optionality creates an incentive for companies that spend on renewables–and disincentives to those that do not–to publish market-based figures.

Reporting using only one approach leads to data inconsistencies and weaker comparisons on company performance. As such, we view best-practice disclosure to include both market- and location-based methods.

“If standardised GHG reporting evolved to include both market- and location-based accounting methods, this would improve benchmarking,” the report says.

Setting the example

While companies have a variety of options to cut their scope 2 emissions, some are more effective than others and contributions toward national and global net-zero goals vary.

Some businesses have made attempts to bring their net-zero goals in line with international objectives, however. In general, their strategies can be divided into two camps: those that focus on how energy is supplied or procured, and those that focus on the demand side.

From a procurement standpoint, S&P see as strongest the strategies that result in the addition of renewable energy generation capacity. From a demand standpoint, the strongest strategies, in their view are the ones that result in the consumption of less energy, or consuming energy at the right time and place to best match renewable energy generation.

There are some measures companies can take to reduce both location- and market-based scope 2 emissions at the same time, for example, improving energy efficiency and shifting to on-site renewable energy generation.

These measures work by reducing purchased electricity consumption altogether, and they are widely recognised as high-impact practices to reduce scope 2 emissions. Additionally, there are some market-based instruments with a high likelihood of driving new renewable energy capacity and hence contributing to real-world emissions reductions.

Impact on corporate profitability

Companies that underestimate their emissions may miss opportunities to reduce emissions and cut costs. Those that report their scope 2 emissions accurately and work towards reducing them may be more attractive to socially responsible investors, customers, and other stakeholders who prioritise environmental sustainability.

By demonstrating a commitment to reducing their carbon footprint, these companies may also be able to access more sustainable financing options, such as green bonds and sustainability-linked loans, at lower costs than companies with higher emissions.

They may also be able to command a premium for their products and services from customers who are willing to pay more for sustainable and environmentally friendly products.

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