Poor Data and Definitions Prevent Climate Progress

By Jack Roycroft-Sherry

In early 2021, climate activists celebrated a landmark climate when a Dutch court legally endorced energy Giant Shell's activist-led emission reduction plan (pictured to the right) It was the first time a major company has been legally forced into binding emission cuts Since then, climate litigation cases have seen record record highs 1800 climate legal cases were filed against firms in 2021, more than double the 800 made through all of 1986 to 2014. However, this rise in legal action in the climate sphere is only a tiny part of a turning tide.

Shareholder proposals are also at a record high;

In may 2021, the activist hedge fund Engine No.1 successfully foreced three new three new members onto oil giant ExxonMobil’s board, after unsatisfactory climate disclosure, has made it unignorable.

Authorities have also been adding to the climate clampdown, with the USA’s Securities and Exchange Commission having recently proposed requiring companies to disclose emissions and climate information. On other side of the Atlantic, as of April 6th 1300 of the UK's largest registered firms will be required to disclose climate-related financial information, and across the Channel the European Banking Authority is soon to require climate and environmental risk disclosures from its lenders However, as new green targets abound amidst pressure to reach netzero greenhouse gas emissions, obstacles continue to thwart real climate progress.

Reluctance for change is inevitable. Firms will challenge court decrees and new regulations just as banks will bemoan climate stress tests and reporting obligations The narrative, however, is that despite truculent companies fighting change wherever possible, with enough ammunition - enough legal cases, shareholder proposals, regulations and reporting requirements - they will be forced to change. It is, unfortunately, not that simple.

Consider the European Banking authorities’ climate disclosure requirments Not a single one of the 109 lenders the authority oversees has managed to complete the full set of its soon-to-be mandatory disclosures, with only 12 per cent managing to declare any climate assessments at all. Although this might appear like it is just another case of corporate intransigence that will not last once regulations become legally binding (which by the end of 2022 these are set to), it is in fact telling of a deeper and more serious issue.

There is almost no way anyone could have expected those banks to conform to such climate requirements. Banks need firms to properly report their emissions if they are to themselves disclose the climate risks embedded in the loans they finance. But according to Val Smith, Citi Bank's chief sustainability officer, most of its clients “are not yet disclosing their emissions, specifically their scope 3 emissions” (FT Moral Money, Feb 2022). You might then reasonably push the blame back further, and propose that it is then these recalcitrant firms that need sufficient regulatory sticks; then the problem would neatly be solved Again, that is too simplistic

In order to have effective climate disclosures and therefore effective change, you need good data and good definitions by which to score progress. For a start, that means having coherent and comprehensive reporting frameworks that make it possible for firms to adhere to set standards. Some such frameworks do already exist. The Task Force on Climate-related Financial Disclosures (TCFD), spearheaded by former Bank of England Governor Mark Carney, has had such a comprehensive methodology since 2017. However, despite many firms taking up such reporting standards, with a quadrupling in companies referencing the TCFD since 2017, few were doing an adequate job reporting under the framework, with many just making glancing references and failing to set and monitor targets Clearly, firms are finding it difficult to disclose emissions too.

One might argue, then, that a resolution will come once authorities agree on set standards and implement them in a legally binding fashion. Perhaps, but then the question would still remain of precisely what standards should be set. Should authorities build regulations from scratch, or build them based on existing ones, such as the TCFD’s, the Global Reporting Initiative's, or those from the International Sustainability Standards board? Each of these considers slightly different metrics and dimensions, including this category but not that; this problem but not that All this begs the question: which problems do we want to solve?

The underlying issue is two-fold. The first is a lack of clarity in terms that help obscure which problems firms should be culpable for. For example, just the term ‘corporate sustainability’ was found to be defined in 33 different ways (Meuer et al, 2019). Or consider the increasingly popular term ESG (Environmental, Social and Governance). Some firms use it as positive advertising to showcase the good they do, whilst others are beaten over the head with it when deemed to be doing the opposite Whilst ESG purports specificity - since it covers the three areas of environmental, social, and governance - it fails to clarify precisely what issues need to be solved within those immensely broad categories.

The second issue is a lack of tools for measuring progress. If we want to measure carbon emissions, e.g. scope 3 emissions arising from the use of end products, then we will require a technological overhaul, otherwise the issue will not be addressed effectively. Measuring carbon emissions is tricky from an engineering, statistical, and accounting perspective. It is no simple feat to accurately pinpoint where emissions come from and therefore who is to blame.

As to solutions, we need not just more data, but high quality data That means, irrespective of which rules firms are forced to comply with, independent audits and checks that help ensure climate and societal issues are measured to the same standards as traditional financial metrics. We should also be careful with overusing vague terms like ESG and sustainability, which more often than not are used to obfuscate rather than clarify. Finally, we need technologies that can help to measure carbon emissions and store climate data. That means investments in carbon trackers. That means innovation in how we measure pollutants. Whichever problems the world deems worth solving, sound data and definitions will be essential.

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