Investors Need to Know the Full Scope of Corporate Carbon Emissions

May 23, 2023 | 1:40 pm
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Laura Peterson
Corporate Analyst & Advocate

The devil is in the details, as the saying goes, and the climate-related details bedeviling many oil and gas company boardrooms this spring sound like a Star Trek galaxy. They’re called Scope 3 emissions, and they are key to understanding the big picture of a company’s impact on the environment. It’s a picture investors are currently missing.

First, let me explain the three “scopes” of carbon emissions. Scope 1 emissions come from power plants, oil rigs and other sources directly owned or controlled by a company. Scope 2 emissions come from energy purchased by the company for such functions as operating machinery or heating offices. Scope 3 emissions account for all the other emissions up and down the company’s supply chain, including those produced by using the company’s products. In the case of oil and gas companies, that means burning gasoline in cars and trucks or burning fossil gas in power plants.

Despite the wonky name, Scope 3 emissions make the biggest contribution to global warming. They account for the vast majority of most companies’ carbon emissions—as much as 90 percent, in the case of the oil and gas industry. That also means they play the largest role in climate-related environmental changes. For example, researchers at the Union of Concerned Scientists have directly linked fossil fuel producers’ Scope 1 and Scope 3 emissions to increases in ocean acidification, global temperature, sea level rise and North American wildfires.

Shareholders demand Scope 3 disclosure

That’s precisely why investors are asking companies to measure and disclose Scope 3 emissions. As of this March, investors had filed 17 resolutions related to Scope 3 emissions for shareholders to vote on this year. Most of them ask companies to set science-based targets, which would include the full range of emissions. The Dutch investor activist group Follow This filed resolutions calling on BP, Chevron, ExxonMobil, Shell and TotalEnergies to set targets for Scope 3. Shareholder advocates argue in these resolutions that Scope 3 emissions must be included in corporate targets to meet the Paris climate agreement goal of limiting global warming to 1.5° Celsius above preindustrial levels.

Unsurprisingly, the companies oppose the resolutions. Chevron’s board of directors said that “reducing Chevron’s absolute Scope 3 greenhouse gas (“GHG”) emissions is not in stockholders’ interests, nor should it be Chevron’s responsibility.” (Chevron’s shareholders clearly disagreed when 61 percent of them voted for a 2021 resolution requesting that the company “substantially reduce” its Scope 3 emissions.) ExxonMobil, meanwhile, argued in its 2023 proxy statement that Scope 3 reporting would force consumers to turn to dirtier sources of energy, such as coal. That’s like saying that requiring calorie information on restaurant menus would force people to binge on junk food.

Methods for measuring Scope 3 emissions

Though the leap of logic behind ExxonMobil’s argument is spurious, there are legitimate criticisms of current methods to measure Scope 3. Several ways to calculate carbon emissions exist, but the most widely used and accepted is the Greenhouse Gas (GHG) Protocol developed by the World Resources Institute and World Business Council for Sustainable Development.

In 2001, the GHG Protocol published the first version of its Corporate Accounting and Reporting Standard, which contained sector-specific tools for corporations. The standard includes 15 categories of Scope 3 emissions, such as transportation and distribution of products, employee travel, and use of commercial products. Critics of the standard, which is now being revised, say it encourages “double counting” of one company’s Scope 1 and 2 emissions and the Scope 3 emissions of a company that purchases or uses those products. In comments filed last year regarding the US Securities and Exchange Commission’s (SEC) proposed climate disclosure rule, energy companies and their trade associations also complained about the lack of certainty and cost to companies to measure emissions further down the supply chain.

In his letter introducing the company’s latest annual climate report, ExxonMobil CEO Darren Woods stated that the company aims to “reform” the Scope 3 provisions of the GHG Protocol, repeating the false claim that requiring oil and gas companies to disclose such emissions would be counterproductive.

So how does the fossil fuel industry think it should measure emissions? Many oil and gas companies use a voluntary standard created by the International Petroleum Industry Environmental Conservation Association (IPIECA). IPIECA’s methodology—coauthored by the American Petroleum Institute, the biggest US oil and gas industry trade organization—is comprised of several Scope 3 emissions categories. Chevron and ExxonMobil provide estimates of Scope 3 emissions under one of those categories—emissions from products sold—but each add their own tweaks. ExxonMobil excludes emissions from refineries to avoid “double counting,” and Chevron uses its own “Portfolio Carbon Intensity” metric.

Many companies—such as Shell—also prefer to disclose their emissions in terms of emissions “intensity,” meaning emissions per barrel of oil, rather than “absolute” emissions, which is a set number measured in metric tons. This method allows companies to get credit for using carbon offsets as well as technologies such as carbon capture and storage. Measuring intensity is critical for creating a complete emissions picture since emissions from oil extraction and processing vary widely depending on their source and such factors as methane leakage and flaring. However, tricky math can result, since a higher number of lower-intensity emissions are not necessarily better for the climate.

The scientific fact is that the world has a limited carbon budget. Absolute emissions of heat-trapping gases must be cut roughly in half by 2030 and reach net zero by 2050 to avoid the worst potential consequences of climate change, and we have to account for the full spectrum of emissions to reach net zero. The GHG Protocol and other carbon accounting methodologies may not be perfect, but they can be improved, and perfect cannot be the enemy of the good when the planet is facing climate chaos. The United States has to coordinate with other nations and intergovernmental institutions to establish a single standard, which also would save fossil fuel companies money by reducing reporting requirements and revealing inefficiencies.

Scope 3 reporting is already a reality

News reports that industry was pressuring the SEC to roll back the Scope 3 requirement in its climate disclosure rule prompted more than 50 federal lawmakers to send SEC Chairman Gary Gensler a letter last March echoing the concerns behind many investor resolutions. “For many companies and sectors, a greenhouse gas inventory that omits Scope 3 would be materially misleading to investors,” the letter states. “Without comprehensive Scope 3 emission disclosures, companies could also simply offload emissions-intensive activities to suppliers or downstream customers to appear cleaner without actually lowering their emissions or the resultant transition risk.” The letter also pointed out that hundreds of institutional investors supported including Scope 3 in comments to the SEC on the climate disclosure rule.

Much of this investor sentiment comes from the fact that Scope 3 emissions reporting is becoming part of corporate reality, ready or not. Last year, the International Sustainability Standards Board—the main global standard-setting body for the sustainability industry—released guidelines for corporate financial disclosure related to climate change that included Scope 3. Around the same time, the European Union (EU) approved its Corporate Sustainability Reporting Directive, which also requires Scope 3 disclosures, although its methodology standards are still under development. The EU directive is much broader than the proposed SEC rule and will apply to moderate-sized companies outside the EU that are listed on EU-regulated financial markets—including Chevron, ExxonMobil, and most other major US-based oil and gas corporations.

Scope 3 emissions clearly must be not only counted, but also dramatically reduced, and dithering about the perfect system for doing so is just another form of delay. The Follow This resolutions give companies discretion over how to account for their emissions, and proposed disclosure regulations also leave corporate management plenty of discretion to meet their obligations. The time has come for the oil and gas industry to tame its inner demons and give investors the most realistic picture possible of its global warming emissions. These little details will have a big impact on our future.