The Biggest Polluters Are Hiding in Plain Sight

September 30, 2020, 6:00 PM EDT

BP oil refinery complex in Scotland in the background and tree branch with withered leaves in the foreground.

It’s only when your car breaks down that you realize you’ve been sold a lemon.

That’s a lesson often applied in financial markets. When capital is flowing freely, investors aren’t likely to spend too long kicking the tires before deciding to put money down. When funding becomes more constrained, they’ll want to examine every detail of the log book before driving off.

This phenomenon was seen most dramatically in the period spanning the 1997–98 Asian financial crisis and the 2001 Enron bankruptcy. People who’d piled into investments suddenly discovered that accounting rules were shot through with loopholes and lacunas, allowing businesses with seemingly robust balance sheets to collapse overnight. That shock, and the desire to tempt back capital with the promise of more transparency, is one of the main reasons that international accounting and audit standards have been harmonized so rapidly in the decades since.

We’re overdue a similar reckoning with the way companies calculate their carbon emissions.

As we’ve written, estimates of corporate carbon footprints currently show about as much consistency as the circa-1996 balance sheets that contributed to the Asian financial crisis. While disclosure of Scope 1 emissions (those from on-site activities) and Scope 2 emissions (from purchased electricity) are improving rapidly, accounting for Scope 3 emissions from the rest of the supply chain is particularly patchy.

That’s a problem for the resources sector, since the Scope 3 emissions from burning or processing the petroleum, coal and iron ore that miners and oil companies produce are by far the largest slice of their carbon footprints.

The 182-page, 15-category guidance for Scope 3 disclosures offers so much scope for discretion and ambiguity that companies can more or less mark their emissions to model — or even refuse to disclose them at all. To counterbalance this, we’ve produced something akin to the Economist’s Big Mac Index — a rough-and-ready measure that tries to make up for its bluntness by being more comparable than official measures.

The calculation isn’t all that hard, and we’re not the only people to have attempted it — the CDP, an emissions-disclosure charity, did a similar analysis in 2017. The factors on which Scope 3 accounting is based are grounded in the fundamental chemistry of organic molecules and the thermal efficiency of industrial boilers, engines and smelters. While the most rigorous Scope 3 accounting should be based on data specific to a company’s customers, fossil fuels are ultimately sold into global markets, where one barrel of oil is pretty much interchangeable with another.

What do the data show?

(Including Aramco, Gazprom, Rosneft and PetroChina takes the total to 27% of global emissions, making listed oil and gas companies the biggest group of polluters in our ranking.)

Finally there’s a group of mining companies that tends to attract less attention than Big Oil.

Note: Steel companies shown account for three-fifths of steel industry emissions.

Our measurements are far from perfect, and should be used as a rough guide only. My colleague Clara Ferreira Marques has pointed out that measurements of Scope 3 emissions are still more art than science. We’re a long way from having the sort of comprehensive disclosure that would be more useful to investors than a feel-good press release.

If you’re tempted to ask why this matters, you’re in the same boat as people who professed no interest in the fine print before investing in Daewoo Motor Co., Yamaichi Securities Co., WorldCom Inc. or Lehman Brothers Holdings Inc. It’s quite possible that a company’s plan for surviving the transition to a decarbonized economy is watertight — but in the absence of disclosed data, you have no way of distinguishing genuine foresight from convenient flimflam.

Circumspect investors choose to trust, but verify. If they want to be well prepared to withstand climate risks, those who commit equity and debt should demand the information that will help them make up their own minds.

Sources: Bloomberg; BP Statistical Review of World Energy; company reports

Note: Figures shown are estimated emissions unless otherwise labeled.

Methodology: Emissions factors based on figures used in Australian national greenhouse accounts. Some judgement has been used in calculating the different grades of coal produced by mining companies. Emissions factors used are: 90.23 kilograms CO2-equivalent per gigajoule for black coal; 93.92 kg/GJ for lignite; 92.02 kg/GJ for coking coal; 51.53 kg/GJ for natural gas; 69.9 kg/GJ for crude oil.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the authors of this story:
David Fickling at dfickling@bloomberg.net
Elaine He at ehe36@bloomberg.net

To contact the editor responsible for this story:
Rachel Rosenthal at rrosenthal21@bloomberg.net

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