Companies often tout their commitments to being environmentally friendly, but a new study from the sustainability tech platform Clarity AI found that many are not transparent about their carbon emissions.
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"It is no longer sufficient to look at companies' commitments and ambitions regarding carbon reduction targets," said Nico Fettes, climate research director for Clarity AI. "Investors now seek to understand the credibility of these commitments and want to know whether companies have realistic and meaningful plans to achieve them."
For advisors who include ESG criteria as a part of their investment strategy, carbon emissions are a major indicator of whether a company's business operations are harmful to the environment.
Clarity AI conducted the study using a large language model that was instructed to find instances where companies both disclosed and quantified their progress toward lowering emissions. The model analyzed the corporate social responsibility reports (including details on emissions targets) of 319 companies with market capitalizations above $10 billion.
Peter Krull, partner and director of sustainable investing at Asheville, North Carolina-based RIA Earth Equity Advisors, speculated that companies' willingness to quantify their emissions is correlated to their progress toward lowering emissions.
"My guess would be that the ones that aren't reporting are the ones who aren't going to hit their targets or don't have realistic goals," he said. "The ones that are reporting are the ones that are actually doing something, they're the ones that are actually trying to make change and pushing change."
A rule from the Securities and Exchange Commission aiming to improve and standardize requirements for public companies to disclose carbon emissions and other climate risks was stayed in early April, shortly after its March approval. The pause came after a wave of lawsuits from groups ranging from fracking companies to the Sierra Club, sought to challenge the new regulation.
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"At some point, there will be regulations that come online that say you can't pump any more out of the ground," Krull said. "But until that time, they're gonna pump every drop that they can because that's what their business model is, and they're not investing for tomorrow. They're simply investing for today."
Almost one-third of companies included in the study in the diversified metals and mining sector (31%) did not disclose decarbonization measures. Over two-thirds of trading companies and distributors (69%) disclosed decarbonization measures, but did not quantify their effectiveness.
Of the companies included in the study that fall in the oil and gas sector, 62% failed to quantify their decarbonization measures.
"Regarding quantification, our model was given relative freedom in the interpretation," Fettes said about the criteria the AI model used. "This encompassed, for example, companies reporting on past contributions of individual measures as well as reporting quantified sub-targets, such as on future renewable energy procurement or increasing recycling rates."
Overall, Clarity AI found that 22% of the companies it studied reported using carbon credits and 38% of companies reported using negative emissions technology as part of their decarbonization strategy.
A majority of companies in the steel sector and in the oil and gas sector included in the study, at 73% and 70% respectively, use negative emissions technologies.
Carbon credits allow companies to produce a fixed amount of carbon; negative emissions technologies such as carbon capture and storage prevent carbon from being released into the atmosphere.
Critics of carbon credits and negative emissions technologies say they do not curb emissions.
"They're a good way to keep doing business as usual," Krull said. "Especially carbon capture. The fossil fuel industry has made that one of the technologies that they support because if you're capturing it, that means you're still burning it."
Instead of relying solely on companies' internal findings to evaluate a firm's climate risks, advisors who employ ESG investing can look to indicators such as the use of certified renewable energy and renewable energy credits.
Advisors can also look to outside assessments like LEED certification and B Corporation status, Krull said.
"There are third parties that actually can come in and show that they're doing the right thing," Krull said.
