Quant firm Research Affiliates (RA) has called for mandatory reporting of corporate emissions after it concluded that third-party estimates of emissions and forward-looking scores were insufficiently accurate to guide investment decisions.
In a study overseen by RA’s European research head Vitali Kalesnik, researchers from the University of Augsburg found that estimates of carbon emissions were at least 2.4 times less effective at identifying the most polluting companies compared to reported data. Estimates were almost exclusively correlated with a company’s sector and size, rather than its emissions.
Using estimates, the researchers said, could “lead to misidentification of brown companies as green companies and vice versa, and ultimately to greenwashing of investor activities”.
In addition, the researchers found no evidence that forward-looking carbon scores and ratings were able to predict future changes in company emissions.
The findings were based on an analysis of emissions datasets sourced from four undisclosed ESG data firms. Company-reported data made up half of the available emissions data, while estimates made up the remaining half.
However, the study also identified issues with company-reported data, the majority of which is voluntary. Researchers said that voluntary reporting could introduce a potential self-reporting bias and prevent comparability between companies due to an absence of a unified standard.
We aren’t suggesting that “that data providers are sloppy estimators”, the researchers said. “Instead, likely because of information asymmetry, these estimates are the best that data providers can make.”
In their conclusions, the researchers recommended the creation of an “international regulatory initiative to make reporting of GHG emissions mandatory”. For now, the researchers suggested that investors could “assume the worst possible outcome, given the information available about a non-reporting company” to incentivise disclosures.
Commenting on the study, Jakob Thomä, Managing Director of think tank 2° Investing Initiative, said that the findings raised “an existential question for low-carbon strategies” as the quality of corporate disclosures had not improved despite increasing regulatory action.
“Unless we have the courage to not just resort to the ‘hope for disclosure’ but the need for new data sources like satellites and asset-level data, we won't make progress fast enough to allow investors to use meaningful data to take meaningful action,” he said.
The findings of the study could add more traction to efforts to make reported carbon emissions data and other foundational climate datasets more widely available. In the EU, regulators are extending the scope of sustainability reporting and developing a public ‘single access point’ which will house all reported data.
There are also industry-led initiatives such as the OS-Climate open source platform, another publicly available resource, which aims to compile standardised climate data and analytics identified as material for investors. Partners of the platform – which include Allianz and S&P Global – have additional licensing rights to leverage the data in their own commercial products.
There is also the longstanding CDP voluntary reporting platform, which scores companies on their environmental performance, however CDP’s full breadth of corporate emissions data is not freely accessible. In 2019, 8,400 companies reported to the CDP, representing over 50% of global market cap.