The proportion of public companies providing disclosures on Scope 3 emissions – indirect emissions from across the value chain, typically accounting for the vast majority of most companies’ climate footprint – has increased to more than a third, according to a new study by investment data and research provider MSCI, which also found a significant increase in corporate decarbonization commitments.
Despite the improvements in disclosure and climate pledges, however, the study found that direct emissions from the companies have not declined this year, and are on track to significantly exceed those needed to achieve the global goal to limit temperature increase to 1.5°C.
For the report, the latest edition of the MSCI Net-Zero Tracker, MSCI assessed the climate change progress of companies within the MSCI All Country World Investable Market Index (ACWI IMI), and included data from its “Implied Temperature Rise” metric. The Implied Temperature tool, which was launched in 2021, converts companies’ current and projected greenhouse gas emissions to an estimated rise in global temperature, taking into consideration the emissions reduction targets of each company.
The study comes as reporting on Scope 3 emissions and on climate plans are expected to become more commonplace, particularly as major regulatory reporting regimes – including in Europe, the U.S. as well as global standards – introduce new mandatory climate disclosure systems within the next few years. The IFRS Foundation, for example, recently announced that its new climate and sustainability reporting standards, which include Scope 3 reporting, and disclosure on climate risks and opportunities, will take effect in 2024.
The report indicated significant increases by listed companies in both emissions disclosure and climate commitments, with 35% of listed companies now reporting on at least some Scope 3 emissions, up from around 30% only seven months ago, and 44% setting decarbonization targets, an increase of 8 percentage points over the same timeframe.
Despite the growing proportion of companies pledging to address their climate footprints, however, the report found that the targets set by companies vary widely in quality and comprehensiveness. Of the targets that have been set, for example, only 30% include net zero goals, and 17% align with a 1.5°C pathway. Even within the net zero targets, some do not cover the entire scope of value chain emissions, and some rely on carbon offsets lacking third party validation, the report found.
Additionally, even as more companies commit to reducing emissions, the report found that listed companies continue to emit at record levels, with 11.2 gigatonnes of CO2e projected by public companies this year, unchanged from 2022.
According to the Implied Temperature Rise metric, only 19% of companies are currently aligned with a 1.5°C pathway, up from 16% from seven months ago, with 51% aligned with the Paris Agreement’s upper threshold of limiting temperature increase to under 2°C, up from 49%. Overall, listed companies overall are aligned with a pathway to a 2.7°C increase.
The report also utilized the Implied Temperature Rise tool to inform investor decisions on potential areas of investment that may see significant improvements in portfolio emissions, identifying high-emitting sectors including utilities, real estate, capital goods and automotive as having high revenue exposure to sustainably produced power and clean technologies.
Sylvain Vanston, Executive Director, Climate Change Investment Research, MSCI, said:
“The equation for investors is that they must address transition risks today or face severe and irreversible physical risks tomorrow, and that they have a role to play in driving the existential change required. Investors can use their strategic levers, including asset allocation, green investments, and engagement with boards and policymakers, to help not just put companies on a net-zero path, but also encourage the regulatory changes needed to level the business playing field between.”
Click here to access the MSCI report.