Key differencesThe terms “carbon emissions” and “greenhouse gasses” are often used interchangeably, but they are not exactly synonymous. Industrial processes produce various combinations of six major GHGs, including CO2. The effects of these six GHGs are compared by applying a carbon dioxide (CO2) equivalency to estimate their global warming potential (GWP). GWP refers to the amount of heat a gas traps in the atmosphere compared to the amount of heat trapped by a molecule of CO2, standardized to 1. GWP is typically expressed over specific time horizons, reflecting the “lifetime” and potency of a gas’s heat-trapping effect. In general, the higher a gas’s GWP, the more heat it traps in the atmosphere.
Tracking and quantifying emissions
In addition to varying sources, chemical compositions, and environmental impact, emissions differ according to where and how they are emitted along a corporate value chain. Scope 1, 2, or 3 emissions must be tracked and measured differently. Scope 3 is by far the broadest, encompassing emissions generated by a company’s suppliers, vendors, and consumers — not just by the company itself. While Scope 3 requires estimation to quantify and innovation to reduce on a company-by-company basis, regulators and investors have realized that to make a dent in global carbon levels, significant carbon emitters must take responsibility for mitigating their Scope 3 emissions.
Taking action: emissions disclosure and reduction
More asset owners and managers want to understand and reduce their portfolio-level carbon exposure. Their reasons may be defensive — adhering to regulations, responding to beneficiaries’ demands, or reducing material investment risk; or offensive — demonstrating leadership and long-termism or addressing a moral imperative. Whatever the reasons, public companies are taking notice.
While emissions data analysis and disclosure are only a first step in measuring a company’s efforts to mitigate transition risks, we believe the effort to do so is a positive sign. Industry initiatives offer guidance on carbon disclosure frameworks. Data providers have begun to aggregate this information, supplement disclosure gaps with estimates, and develop tools for investors to measure the carbon footprints of their investments, using company-level data.*
As a supporter of the Task Force on Climate-related Financial Disclosures (TCFD), CDP, Transition Pathway Initiative (TPI), and other climate initiatives, Wellington supports greater transparency on emissions. We do this through stewardship — our engagement and voting practices — and by integrating carbon emissions data into our research.
As more companies bolster emissions measurement internally and disclose emissions in filings and annual reports, we expect datasets to more accurately reflect unique business models and ongoing efficiency measures. It is clear from our conversations with management teams that many companies are eager to understand best practices and enhance their disclosures accordingly, with a growing appreciation that attracting future capital may depend on it.
*We will discuss carbon footprints in a future Climate 101 post.