The heat is on: disclosure of corporate emissions

Fred van Beuningen

Oct 1, 2023

Net zero is a corporate norm, with almost two-thirds (65%) of the annual revenue of the world’s largest 2000 companies now covered by a net zero target, 67% of fossil fuel firms have net zero commitments, national net zero targets now collectively represent 88% of global GHG emissions. 

The absence, however, of clear fossil fuels phase-out plans leaves those targets misaligned with the scientific and policy consensus. Companies struggle to balance carbon neutrality with a value creation strategy and the short with the long term. Business as usual is no longer an option for companies with high emissions, and effective transition plans will include portfolio shifts, the decarbonization of the existing asset base, the creation of new businesses, and the development of green premium products. Right now, we have seen a strong increase in the number of commitments, but the credibility is concerning. 

National governments have mostly committed to net zero ( 92% of global GDP, up from 68% in December 2020). Putting aside the possibility of populist politicians coming to power and fact-free policies, unfortunately, a real possibility in some countries, we may expect governments to want to deliver on the targets, measure progress towards them, and design effective net zero policies. 

“We find that the overall robustness of companies’ net zero targets remains low and collective progress too slow. To become true climate leaders, companies must reflect seriously on the UN Expert Group’s recent markers of credibility and other Paris-aligned standards and urgently update their currently weak plans with robust implementation strategies.” Dr. Takeshi Kuramochi, Senior Climate Policy Researcher at New Climate Institute.

What gets measured gets done

“What gets measured, gets done”, said management guru Peter Drucker. It is reasonable to expect that companies and countries will want to measure, disclose, and manage emissions. Mandatory disclosure can facilitate progress on climate change. Provided a mandate produces reliable measurements of GHG emissions, disclosure would allow financial markets to better price emissions, as well as provide a foundation for policies to restrict emissions. Mandating disclosure would also provide information on material risks to investors, making it evident which firms are most exposed to future climate policies.

What may disclosure reveal? A recent study from Christian Leuz (University of Chicago) and colleagues assesses the  “corporate carbon damages” from 15,000 public companies and concludes that 44% of their profits are impacted should they be mandated to pay for the environmental damages. Nearly 90% of that calculated damage comes from four industries: energy, utilities, transportation, and manufacturing of materials such as steel.

New European regulation and the draft SEC rule look at all scopes (1,2, and 3) and the carbon intensity of a revenue unit. 

Urgency required

“Walk the talk” is sound advice for leaders and companies alike; it determines credibility and future success. Walking the talk for hard-to-abate industries (fossil feedstocks, high temperatures, large existing asset base, and emissions from the products in use) will require the design and implementation of transitional carbon-neutral strategies, innovation, and new business development. With many institutional investors aiming to have carbon-neutral portfolios, regulators pushing for disclosure, and the possibility of regulation through carbon pricing, forward-looking companies will design and implement a value-creation strategy towards net zero. These strategies are constrained by the company’s portfolio vulnerability to the carbon price and existing profit levels, with the decarbonization of the existing asset base as the no-regret option.