Selective accounting of emissions paints an inconsistent picture

TCFD has emerged as the way to measure emissions. Reporting emissions requires asset owners to understand what’s in the numbers….and what’s not. Only 5 years remain until 2030, yet questions are multiplying. What has been achieved in real world terms? What exactly do issuers, asset managers, or external evaluators (like MSCI or Sustainalytics) mean by “decarbonisation pathways” and Paris alignment? Has generating lots of numbers, jargon and reports displaced the focus on real world change? What do those numbers actually count? What does “low carbon” mean? And who is cooking the proverbial books rather than undertaking the difficult changes required?

These questions and more should stay front of mind as asset managers, investors and their agents monitor progress towards net zero, be it for TCFD reporting or UK Stewardship Code submissions, disclosure to stakeholders or otherwise.

What’s important gets measured

Market participants have tended to focus on Scope 1 emissions (from operations) and Scope 2 (from energy imported into operations). Scope 1 & 2 are more straightforward to measure. Unfortunately, for emitters other than airlines, the construction industry, freight transporters or utilities, Scope 1 & 2 generally represent the smallest share of emissions.

Scope 3 emissions up and down the value chain—from suppliers to inputs to embedded emissions in buildings to customer use of products, to 3^rd party transport and logistics to end-of-life recycling or disposal—are not yet systematically counted by most businesses.

Nonetheless, companies increasingly publish so-called decarbonisation plans outlining their strategies for reducing Scope 1 & 2 emissions to below levels of 2020, 2015 or some other benchmark. Annual reports are often accompanied by slick ESG and sustainability reports trumpeting progress made towards those goals and the pathway ahead. Such presentations appear reassuring and suggest that things are headed in the right direction. Of course, the focus on Scope 1 & 2 decarbonisation pathways only tells a small part of the story. Often even that small part cannot be taken at face value.

Scope 1 & 2 measures are easy to “game”

Selection of accounting methodology and careful word choice can have a material impact on what Scope 1 & 2 emissions are disclosed. Many operators include only those of operations that are consolidated onto their balance sheet and where they exercise full control. Joint ventures (JVs) and other partly owned associates, where ownership, control, risks and benefits are shared, are conveniently excluded from the “operated assets” reported in Scope 1 & 2. In industries like oil & gas or minerals and mining, where such JVs are common practice, restricting Scope 1 & 2 reporting to “our operated” assets[1] reflects one accounting treatment, not the reality of how a company operates. Financial contributions from JVs and other associates are usually included using the “equity method” for accounting purposes, but often not for emissions disclosure.

Why does this matter? Many examples exist but Shell’s reporting offers a good illustration.

• Shell’s aggregate Scope 1 & 2 emissions, including JVs and associates, are roughly 1.5x those from only its owned /directly operated assets. Shell highlights figures for its owned and operated assets in its glossy Energy Transition Strategy document. On page one the Chair writes, “Our target to become a net-zero emissions energy business by 2050 remains at the heart of our strategy.” Shell’s net zero targets are all based on its owned/directly controlled operations, conveniently omitting a material share of JVs and other associations.
• To find Shell’s emissions more holistically using the equity method, one must go on the investor relations website, download a supplementary information file in excel, go to the correct tab and find the data. It is questionable how many analysts will do this work, especially if they are replaced by AI bots that have been “trained” on data and verbiage presented far more prominently and digestibly in glossy reports.
• In late 2024, Shell and Equinor announced plans to combine their North Sea assets into a new company with a new operator that they would jointly own. This new JV likely means that Shell’s North Sea fields will drop out of the Scope 1 & 2 figures for “our operated” assets. Effectively deconsolidating a firm’s assets, yet continuing to benefit from them, is a disingenuous way to “decarbonise” a business. It undermines the company’s other net zero claims.

Fortunately, some companies have responded to engagement by investment managers on this topic. European Energy majors Equinor, Eni and BP now report emissions reflecting all operations, whether controlled or not. For many years, US energy major Chevron has been reporting in great detail emissions for its owned and JV operations. Moreover, Chevron reports metrics beyond TCFD emissions including its own energy efficiency and water management. Chevron uses its influence to make non-controlled JVs and associates adopt reporting and efficiency goals similar to its own.

Engagement continues with Shell and other issuers around TCFD disclosure based on the equity method of presentation. Unless all companies agree to include assets over which they exert significant influence, but do not control outright, the gap between GHG figures for equity accounting vs. directly owned and operated assets will remain wide. In that case, it will be hard to rely on any of their decarbonisation claims.