08 June 2022
In this paper, FTSE Russell surveys the current state of corporate carbon disclosure and explores the challenges facing investors in using estimation strategies.
Emissions data is increasingly critical for capital allocation—whether for setting portfolio targets, constructing sustainable investment products, regulatory reporting, or net zero alignment tools. In this paper, we re-examine data available on Scope 1 and 2 corporate greenhouse gas emissions across a broad range of investment universes.
We argue that mandatory disclosure standards—as currently implemented in the UK and proposed by the Securities and Exchange Commission in the United States—are urgently required for emissions data. In the meantime, the choice of estimation methods carries greater significance than is often assumed and requires careful consideration. Markets require transparency on the models used; at a minimum routine reporting should include details on the ratio of estimated vs reported carbon data, a summary of estimation methods and model specifications, and disclosure of any adjustments or standardization of reported data.
We finally propose an improved estimation strategy, combining the strengths of several existing methodologies, and introduce a new FTSE Russell carbon emission dataset for c. 10,000 companies based on a hierarchical, multi-model approach. We show that this provides improved accuracy and, in particular, reduces the risk of underestimating emissions, which has attracted greater scrutiny as the transition accelerates.
To demonstrate why this matters, we go back to basics and set out two persistent challenges facing investors:
- The Disclosure Gap: Even in markets with well-developed sustainability reporting, there is a significant share of companies that are still not disclosing their operational emissions. Although there is a common perception that this disclosure gap is closing rapidly, our research suggests that recent progress has been incremental at most. In some sense this gap is widening, as sustainable investment strategies and reporting are applied ever more broadly across regions and to smaller firms as illustrated by the impact of China A inclusion on disclosure rates in key global benchmarks (see Figures 1 & 2).
- The Estimation Gap: In the absence of universal reporting, investors routinely turn to estimates to fill missing values. However, significant challenges remain in effectively estimating carbon data, with no industry or scientific consensus on the best method, despite extensive research over the past two decades. We systematically evaluate the major approaches with sobering results—regardless of the strategy used, almost half of estimated values diverge from reported data by 100%, large enough to sway the weighted average carbon intensity (WACI) for a large, diversified global portfolio by several percentage points.
1 Indices as at 31/12/2020 and using FY2019 emissions data although FTSE All World, Emerging and Developed as at 31/12/2021 using FY2020 emissions data. Firms disclosing in FY2019 assumed to disclose in FY2020. Disclosure requires reporting of both Scope 1 and Scope 2 emissions.