Measuring carbon footprint alongside profits

This story first appeared in an earlier version of the Luxembourg Times magazine.

Moving to an economy that is carbon-neutral – a goal of the European Union for 2050 – will require accurately measuring greenhouse gas emissions, and ideally publicly disclosing them. Yet there is a long way to go before that happens, because the EU’s new sustainable labelling method, the so-called taxonomy rules, do not require companies to disclose their emissions.

Firms that are keen to know their carbon footprint typically follow the Greenhouse Gas protocol, the world’s most widely used standard, developed by two research institutes. The release of carbon from corporate activities is divided in three types.

The first – scope 1 – captures emissions produced directly by the company from fossil fuel such as an oil power station or a vehicle fleet. Scope 2 relates to a firm’s indirect emissions through its consumption of electricity to run a factory, or heat offices. The most tricky part to assess, scope 3, measures the greenhouse footprint from suppliers, producing and transporting components to customers using and discarding the product.

“The carbon footprint is more than a responsible approach per se, it’s a risk-based approach,” said Jean-Yves Wilmotte, head of finance at Carbon4, a consultancy that helps firms and investors model their carbon footprints. “If in a low-carbon world, suppliers and clients can no longer operate, your business will have a problem.”

Categories of emissions © Photo credit: Carbon 4

The size of the three scopes will vary depending on the sector a firm operates in, such as mining, cosmetics or hospitality. For car manufacturers, scope 3 will be the largest, as it will include the emissions from their entire fleet driven by customers during the lifespan of the car. The incentive here for companies such as Volkswagen or Renault will be to improve the performance of its vehicles by reducing the amount of carbon released per kilometre.

For power plants, scope 3 will be 80% of their impact. Shell, the Anglo-Dutch oil major, said it would be carbon neutral by 2050. But this would only include its scope 1 and 2 emissions, which corresponds to its distribution and headquarters.

The method is standardised, but often poorly applied by companies. Some – like Shell – are not reporting the entire extent of their emissions, especially in scope 3 where activities do not fall within the direct responsibility of companies, Wilmotte said. The risk is that those seen as good performers will be firms that underplay their emissions, while being more meticulous will be penalised.

Self-Reporting

Fund managers can rely on information provided by consultants like Carbon4 or S&P’s Trucost, who calculate companies’ carbon footprint from their financial accounts with the help of proprietary models. Otherwise, investors will depend on the accuracy of what companies disclose. Hence, their green credentials within the EU taxonomy will hinge on good faith.

“There needs to be an external audit to validate that self-assessment,” said Natalie Westerbarkey, head of sustainability at Fidelity. “Some might say they don’t have the technology tools to measure their carbon footprint or they might be very large multinational organisations where there needs to be an entire department to do an assessment.”

Companies disclosing to CDP in Luxembourg include steel firms APERAM, ArcelorMittal, food distributor B&S Group, national media RTL Group and satellite firm SES.