For super funds and their advisers

Research Affiliates backs new emissions reporting plan

Vitali Kalesnik

Research Affiliates, US-based global quant manager which has established offices in Sydney and Melbourne in the past couple of years, has called for compulsory changes in the way companies report carbon emissions to assist the investment world make more informed decisions about responses to the impact of climate change.

Vitali Kalesnik, partner and European director for research at Research Affiliates, and two US academics, Marco Wilkens and Jonas Zink of the University of Ausburg, have produced a paper, ‘Green data or Greenwashing? Do Corporate Carbon Emissions Data Enable Investors to Mitigate Climate Change?’ which questions current practices.

The research suggests the mandatory reporting of climate-related information and finds that estimated carbon emissions data – composing much of the data on carbon emissions – often lack accuracy. Compared to reported data, estimated data lead to a significant loss of efficacy in investor actions on climate change and carbon emissions. Key points of the research include:

  • As investors strive to help mitigate climate change, they critically depend on carbon emissions data. Absent mandatory reporting, although roughly half of companies (between 47 per cent and 62 per cent) voluntarily report their carbon emissions, a substantial amount of emissions data are estimated by data providers. “We evaluate three types of carbon emissions data from four popular data providers: currently reported; currently estimated; and,” the authors say.
  • “We find that the voluntarily reported data are the best in quality. The data on estimated emissions, while accurate, are at least 2.4 times less effective than reported data in identifying the worst emitters.
  • “We find that estimated data reflect almost entirely only size and industry information, which makes estimated data ineffective in identifying green companies in brown sectors. This further reduces the efficacy of investor actions.
  • “Further, we find no evidence that forward-looking carbon scores predict future changes in emissions.”

The paper says: “Our results debunk the belief that third-party estimated emissions are a satisfactory substitute for company-reported emissions and call for mandatory and audited carbon emissions disclosure.”

The potential for ‘greenwashing’ under current practices is high. The analysis suggests the solution could be the introduction of an international regulatory initiative with mandatory reporting of greenhouse gas (GHG) data. This should be accompanied by the establishment of a single standard and the introduction of mandatory auditing to ensure data quality, the paper says.

The authors also take a hard line on companies which are reluctant to get with the proposed program. They says: “One way for investors to incentivise companies to start reporting is to assume the worst possible outcome given the information available about the non-reporting company, as proposed in the United Nations (1992) precautionary principle.” That is to suggest, investors can vote with their feet.

Vitali is scheduled to speak at a webinar targeting Australian and New Zealand industry participants on November 18 at 12.00pm. It is being held in conjunction with the CFA Societies.

– G.B.

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