Global businesses are actively reporting on carbon emissions and allocating substantial resources to meet their climate obligations, or at least they are appearing to. The reliance on outsourced decarbonisation consultants raises doubts about their true impact.

For smaller firms, it's a bit of a balancing act between doing some reporting or none at all. Where export is a major component of their business, reducing carbon emissions is important in gaining an advantage, as the global market becomes increasingly low-carbon focused. It can also reduce costs and increase access to finance and insurance options.

There is one challenge all companies share and that is overcoming the limitations of available data.

When the quality of reporting can only be as good as the data allows, it brings reputational risk into play. As a result, one common feature of climate action reports is the way a company will qualify its emissions statements with a disclaimer that typically reads:

“Due to our reliance on external data, and external data providers’ controls in producing the data, there are risks regarding the lack of completeness of data, unverified data sources, and complexity and judgement involved when the emissions data is sourced.”

In other words, this information is incomplete and therefore unreliable.

The investor's challenge

Investors have their own concerns about data quality and how to meaningfully reflect carbon footprinting in their annual reports. Just recently, the $330 billion US pension fund Calstrs delayed publication of its annual carbon footprint report after discovering significant data issues.

The emissions data gap is a massive problem, at a time when reporting on it is increasingly mandatory. How to accurately measure it when approximately 80% of listed companies around the world — that’s 50,000 companies — don’t report anything on emissions?

The need to account for Scope 3 greenhouse gas emissions along supply chains and product portfolios presents the greatest challenge.

Scope 3 emissions are the hardest to identify, and can be challenging to measure accurately. But since most of a business’s emissions will be scope 3, measuring and reducing these emissions is crucial to sustainability success. It can be difficult to measure, though. Investors and data aggregators are reliant on a company’s own materiality assessment, in many cases.

While Scope 1 and 2 data are arguably robust enough to enable accurate emissions mapping, that is not the case for Scope 3, where it is estimated that 50% of major listed companies are under-reporting.

Despite the limitations of the reporting and the resulting disclaimers that feature in most studies, Scope 3 reporting is considered essential. Businesses and their investors would be mistaken for ignoring it.

Scope 3 emissions can represent a company or a sector’s most material impact on climate change. More positively, companies making an effort to reduce Scope 3 emissions – for example in business travel or supply chain – can drive large-scale change across business and society.

The advice to businesses looking to measure their carbon impact is to focus on key areas of materiality. These range from packaging to biodiversity to modern slavery and emissions. Consider what is the most material element your business can tackle.

Technology offers an opportunity

There is hope for a step change in the quality of emissions data, if artificial intelligence can be utilised in the aggregation and interpretation process. AI tools can help increase the granularity of available data, as well as enhancing the predictive analysis of the climate scenarios used to assess future climate risks.

Machine learning, among other AI applications, is expected to be the key to improving the carbon reporting capability of companies and their investors. Advancements in AI are already playing a pivotal role in enhancing ESG management, enabling companies to comply with looming ESG regulations.

The technology is also expected to help business and finance understand how future carbon constraints will translate to carbon transition risk. For investors, this will taking their financial data and propagating future climate scenarios; mapping different outcomes, for a 1.5-degree world, or 2 degrees, or 4. That will allow them to take action to protect their portfolio