Only half of companies in Germany’s benchmark DAX-40 stock market index have reported on more than four of 16 categories for indirect greenhouse gas emissions, presenting fund managers and investors with a headache as new EU environmental regulations come into force.
Fund managers are due to start ESG reporting, including indirect or so-called scope-3 GHG emissions, on their investment portfolios from next year when the EU’s Sustainable Finance Disclosure Regulation (SFDR) comes into force.
So what’s the problem?
There is problem of regulatory timing. Larger companies themselves start reporting only in 2025 on their 2024 figures to comply with the EU’s Corporate Sustainability Reporting Directive (CSRD). Until that happens, DAX-40 disclosure shows how uneven the available data are.
“The pressure on companies to report their CO2 emissions is steadily increasing – both through regulation and from investors,” says Bernhard Bartels, managing director at Scope ESG Analysis. “While most companies already comprehensively report their direct or scope-1 emissions and the emissions from energy consumption (scope-2), there are major differences in the reporting of indirect or scope-3 emissions.”
Inconsistent ESG reporting, by no means confined only to Germany’s larger companies, complicates the task for fund managers invested in these companies to make consistent decisions in putting together sustainability-linked portfolios.
How big a problem is it for green investors?
Seven DAX-40 companies have not reported on scope-3 GHG emissions at all. Six have reported on no more than two categories. Less than 50% have reported on the most relevant category “use of sold products” and only 26 provide information on the emissions in “purchased goods and services.” In addition, companies use different methodologies to account for their indirect emissions.
“The results indicate that the complexity of capturing scope-3 emissions varies greatly between industries,” says Bartels.
Take banks and insurance companies which rely on the scope-3 emissions of their borrowers to report their own scope-3 emissions. Other sectors face the problem of complex and sometimes unstable supply chains that make it difficult to calculate emissions all along the value chain, with the textile industry a good example.
A tough problem to solve
The situation is demonstrating yet again how difficult it can be for public companies – in these case German ones – to comply with the stringent new climate emissions reporting requirements. Teething problems are to be anticipated, but for fund managers it is becoming especially challenging, as they have their own reporting standards – including to end investors – to meet.
The problem will be compounded in other, less efficient markets, with smaller companies and with more illiquid investments. While the regulatory focus currently remains on the larger DAX companies, which admittedly have the most impact on the environment, we anticipate further reporting issues to emerge for fund managers going forward.
