Carbon accounting is the first step to net zero

15 August 2022

The earth is on a trajectory to reach a global climate disruption. There is an urgent need for short-term action to fulfill the goals set by the Paris Agreement to limit global warming to 1.5 °C per year. All companies and industries need to decarbonize and collectively accomplish the transition to sustainability, but many companies still do not systematically measure and disclose the climate change gas emissions generated by their activities.

“Carbon accounting” is needed at the company level to identify and manage climate-related transition risks and opportunities. It is of the highest interest for companies across economic sectors to know, disclose, and manage their direct and indirect emissions, categorized by scope and distinguished according to source within the organization’s value chain.

Aggregated data give a more comprehensive picture at a higher level. For example, the MSCI Net-Zero Tracker estimates that listed companies will burn through their share of the global carbon budget by February 20271. To some extent, companies are reacting: of the more than 2,900 companies in the MSCI ACWI Index, about 45 percent had set emissions reduction targets2. About one third of those targets aim to reduce the company’s greenhouse gas emissions to net zero. This means greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere.

Missing information

Because the first step to reducing emissions is to know and to report those emissions, we have moved one step back and examined the disclosure of around 6,150 listed companies worldwide, based on a Refinitiv dataset3. Not even half of the companies disclosed their emissions for the year 2021. In other words, according to the data, information is missing about thousands of sources of emissions.

Most companies that make a report will disclose both Scope 1 emissions (which includes all direct emissions that occur from sources owned or controlled by the reporting company) and Scope 2 emissions (which comprise indirect emissions from purchased energy that is generated outside the companies’ own system boundaries). Their number reached just under 40 percent.

Company size matters a lot. While seven out of ten large-cap companies report on Scope 1 and Scope 2 emissions, only three out of ten small-caps do. Larger companies can be subject to stricter disclosure requirements, and in any case, they have more resources to deal with tasks not directly related to business operations.

Scope 3 emissions add complexity

The picture changes slightly when Scope 3 emissions are examined. One out of two large-caps reports on other indirect emissions not included in Scope 2 that occur in their value chain, but only one out of six small-caps provides this data. Complexity increases for Scope 3 emissions because of their origins outside of the organization, which may explain these numbers.

In Switzerland, disclosure is above average, with over 90 percent of the analyzed large-cap companies reporting their Scope 1 and Scope 2 equivalent emissions in 2021 and 82 percent showing their Scope 3 emissions. Binding rules are underway that will oblige companies of a certain size to make climate-related disclosures, probably by 2024.

An analysis of the economic sectors makes apparent that a higher percentage of companies in sectors that are generally negatively associated with climate issues disclose their emissions. For example, approximately 50 percent of basic materials producers, utilities, and energy companies report their Scope 1 and Scope 2 emissions, whereas only about 31 percent of technology companies and 17 percent of healthcare companies disclose them.

Benefits of transparency

The numbers display room for improvement. There are direct benefits from measuring, reporting, and managing environmental performance, such as lower energy and resource costs, a better understanding of the exposure to the risks of climate change, and greater credibility both internally and in their engagement with stakeholders.

In addition, not only emission-intensive companies should increase their efforts in reporting, disclosing, and reducing greenhouse gases—greater effort should be expected of low-emission entities as well. Even though their individual impact may seem relatively small, the sum of these companies can be quite significant, and every contribution counts.

1 based on their emissions as of May 31, 2022
2 as of March 2022
3 as of July 2022