Carbon Reporting Trends: Has Global Progress Stalled?

Key Takeaways

• Almost 80% of companies in the MSCI ACWI have recently disclosed their Scope 1+2 data, but only 60% of them reported at least some of their Scope 3 emissions.
• After strong increases from 2019 to 2022, global disclosure seems to have plateaued, with the proportion of companies from Asian emerging markets being 30-40 percentage points lower than that of companies from industrialized countries.
• According to our models, the quality of Scope 3 data has improved from a low starting point over the past five years but still remains significantly below what we would consider good or very good quality.
• Overall, the quality of Scope 1+2 data has not changed significantly over the same period and remains at a medium level.

The demand for greater transparency regarding the financed emissions of investment portfolios is intensifying, driven by increasing regulatory and voluntary disclosure initiatives. Despite significant progress in corporate greenhouse gas (GHG) emissions disclosure, there are signs that momentum may be stalling.

After strong increases from 2019 to 2022, global disclosure seems to have plateaued with the proportion of companies from Asian emerging markets 30-40 percentage points lower than that of companies from industrialized countries.

Beyond quantity, the quality of the data has improved over the years, but it often remains inadequate to meet the growing demands of climate-conscious investors.

Additionally, regulatory frameworks and voluntary reporting initiatives are tightening their requirements, increasing the urgency for reliable and comprehensive emissions data that continues to outpace the current level of corporate transparency.

In this article, we take a closer look at corporate emissions data and its relevance for portfolio carbon footprinting. We explore how corporate reporting on GHG emissions has evolved historically and what insights can be drawn about the quality of this data using Clarity AI in-house data reliability models. Our analysis focused on companies currently in the MSCI ACWI, a representative stock index with over 2,700 companies from both developed and emerging markets.

Carbon Reporting Rates Have Been Going Up, But Gaps Remain

Emissions data reported by companies is attributed higher quality than estimates from third parties, according to the Partnership for Carbon Account Financials (PCAF), a globally recognized standard for measuring and reporting on financed emissions.

At Clarity AI, we collect GHG emissions data from annual, sustainability or TCFD reports, as well as CDP disclosures on an annual basis for a large universe of companies, including those in the MSCI ACWI, where available. We collect data on Scope 1+2 as well as Scope 3 emissions, the latter often accounting for more than 60% of a company’s total emissions, thus holding particular significance.¹

Source: Clarity AI
Note: Data as of August 2024

Regarding Scope 3 emissions, our data shows that global disclosure rates have risen from 34% in 2019 to 60% in 2023², representing an increase of over 75%. Our analysis includes companies that publicly disclose emissions for one or more of the fifteen Scope 3 categories. In Europe and Japan, nearly 90% of companies in the MSCI ACWI index now disclose their Scope 3 emissions. While disclosure rates have been gradually increasing across regions since 2019, they started from different baselines.

For instance, in 2019, 60% of companies in Europe and Japan were already disclosing Scope 3 emissions, compared to only 35% in the U.S. and 22% in Asian emerging markets. Companies from Asian emerging markets continue to lag behind globally, with just 41% of index companies disclosing their Scope 3 emissions. In terms of growth, the increase in disclosure rates appears to have plateaued across regions.

Source: Clarity AI
Note: Data as of August 2024

Regarding Scope 1+2 emissions, our data indicates that the percentage of companies in the MSCI ACWI index publicly disclosing has steadily increased from 58% in 2019 to nearly 80% in 2023. U.S. companies, starting from a much lower base in 2019, have now reached a 90% disclosure rate, nearly catching up with their European and Japanese counterparts.

While disclosure rates among companies in Asian emerging markets have also risen rapidly, at 60%, they remain significantly lower than those of their Western peers. In addition, growth rates have recently slowed considerably.

Data Quality Has Improved, But Gaps Remain

At Clarity AI, we use proprietary models to assess the reliability of the self-disclosed emissions data. For Scope 3, where corporate reporting is less developed and the overall data availability is more fragmented compared to Scope 1+2, our model is mainly based on the following checks:

Completeness: Checks whether the company has reported emissions data for all industry-relevant Scope 3 categories. We have determined category materiality for over 160 GICS sub-industries.

Industry range: We test whether the value falls within a specific range around the industry mean. Ranges were defined using a high-quality Scope 3 validation sample.

Third-party verification: Checks whether any portion of the company’s Scope 3 emissions have been verified by a third party. Verification is best practice and increases the trustworthiness of the reported data.

This model allows us to score the quality of the data from zero to five.

Source: Clarity AI
Note: Data as of August 2024

Our analysis found that Scope 3 data quality has improved significantly across regions, starting from a very low baseline in 2019. The average score for the entire index increased from 1.4 in 2019 to 2.9 in 2022, reflecting an improvement of over 130%. One of the main factors behind this improvement is the growing number of companies disclosing both more and relevant Scope 3 categories.

However, the global average remains well below what should be considered a sufficiently high-quality or very high-quality disclosure, indicated by reliability scores of 4 or 5. The analysis shows that despite the gains, there are still substantial gaps in the quality of companies’ Scope 3 disclosures. This issue is particularly pronounced among companies from Asian emerging markets, with an average quality score of 2.2, suggesting significant room for improvement.

Our Scope 1+2 model works differently and includes a more detailed analysis, due to the higher maturity in the disclosure of these metrics, compared to Scope 3 emissions. The results of the two models are therefore not directly comparable.

The Scope 1+2 model uses a supervised machine learning algorithm to analyze relationships of emissions data with over 90 additional company features including revenue, market capitalization, number of employees, or industry classification. Based on a robust and high-quality validation data set, our model checks for the plausibility of each relationship to produce an overall reliability score on a scale from zero to one.

Our analysis reveals that, for the entire index, the average reliability score has remained just around 0.5 since 2019, indicating consistent and average quality levels in corporate disclosures over time. We did not observe notable differences in average reliability across regions. In fact, if anything, there was a slight decline in data quality in 2023.

One possible explanation for the recent decline is that the largest increase in new disclosures in 2023 came from U.S. companies, whose data quality scores were, on average, 10% lower compared to new responders from other regions.

The Growing Role of Regulatory and Voluntary Standards in Corporate Emissions Disclosure

Disclosure standards are increasingly being incorporated into regulations, voluntary disclosure mechanisms, and industry frameworks. In Europe, the Corporate Sustainability Reporting Directive (CSRD) and the underlying European Sustainability Reporting Standards (ESRS) require financial institutions to disclose their financed emissions according to the Partnership for Carbon Accounting Financials (PCAF) standard. Meanwhile, Japan is currently consulting on the integration of International Financial Reporting Standards (IFRS) sustainability standards into national disclosure regulations, which includes mandating the disclosure of financed emissions³.

Beyond regulatory requirements, the disclosure of financed emissions is strongly driven by voluntary mechanisms, particularly the CDP. In 2023, over 550 global financial institutions reported sector-specific climate impacts to this non-profit organization, often including their portfolio carbon footprints. Additionally, portfolio target-setting frameworks such as the Net Zero Investment Framework (NZIF) and the Net-Zero Asset Owner Alliance’s (NZAOA) Target Setting Protocol mandate the monitoring or reporting of specific financed emissions metrics.

In light of this, the availability and quality of corporate emissions data play a crucial role. Consequently, corporate disclosure of these emissions has become even more important, as self-reported data are preferred over estimates by reporting standards like PCAF. Financial institutions thus remain dependent on the disclosure of this data by their invested companies.

In this article, we found that despite a significant positive trend since 2019, there are still considerable gaps in disclosure, especially for Scope 3 emissions. Despite their importance, on average, only 60% of companies worldwide disclose their Scope 3 emissions, at least partially. Companies from Asian emerging markets, in particular, have significant catching up to do regarding overall disclosure across all scopes. Even stronger engagement and support from their shareholders could help close this gap.

Moreover, we showed that the quality of disclosed data has evolved differently depending on the emissions scope. Our in-house models identified a significant improvement in the quality of Scope 3 data since 2019. However, the overall quality of these data still falls short of what we would consider good or very good for carbon risk analysis. In contrast to this positive trend, the quality of Scope 1+2 data from the companies analyzed has not improved over time and remains at a moderate level, according to our reliability standards.

Thus, there is still much work to be done in terms of the availability and quality of self-reported corporate emissions data. The regulatory pressure on companies in certain regions of the world and the increase in audit requirements will likely improve the situation in the coming years. In the meantime, financial institutions can contribute to improving the data landscape by critically evaluating the quality of their portfolio footprints and engaging in dialogue with the “disclosure laggards” within their portfolios.

¹Scope 1+2 emissions cover a company’s direct emissions and those associated with its energy consumption, while Scope 3 emissions are linked to emissions within the company’s value chain, such as those generated during the production and delivery of raw materials or the use of sold products and services.

²The calendar year refers to the year of when the information was disclosed.

³Article 29 of the IFRS S2 standard.