Analysis of Carbon Disclosure Data for U.S. Equities Within the Electricity Generation Sector

Abstract

With the historic international climate agreement made in Paris still fresh in their minds, investors are looking at Environmental, Social and Governance (ESG) data to increase alpha in the upcoming low carbon economy. By identifying the non-financial data that is material to a particular company and/or its sector, investors hope to gain insight into the company’s performance. In the electric generating sector, the company’s “impact on the environment” has been identified as one of the material ESG factors. Included in this impact are the company’s greenhouse gas (GHG) emissions as seen in their carbon footprint. This footprint is a measure of the company’s “climate-friendliness” or contribution to climate change (Raynaud, 2015). Analyzing a company’s carbon footprint is an integral part of the risk assessment of the entity. Consistency of carbon data, critical to the risk assessment, has been a concern. Both investors and asset managers are interested in climate change risks and how these will affect their investment and portfolios.

The 2013 GHG emissions data disclosed by the electric generation sector, one of the most carbon intensive sectors, was analyzed using regulatory and voluntary data disclosures. This data was collected for 29 large and mid-size electric utilities which are U.S. parent companies publicly traded on the New York Stock Exchange (NYSE). Research was done to determine if the emissions that these companies are voluntarily disclosing within their annual 10-K report, sustainability/corporate social responsibility (CSR) reports and to the Carbon Disclosure Project (CDP) are consistent and “reasonable”. This research evaluated whether GHG emissions being reported by the companies are a true measure of the company’s “climate friendliness”.

In 2013, 11 out of 29 companies (38%) made no mention of their GHG emissions in the annual 10-K reports filed with the SEC. The emissions disclosed in the various sources indicated that most electric utilities were disclosing the minimum level of scope 1 stationary combustion emissions. Scope 2 emissions from Transmission & Distribution (T&D) losses were not openly disclosed by 22 out 29 companies (76%). Scope 3 emissions from purchased electricity also were not disclosed for the majority (76%) of electric utilities. Of the scope 2 and 3 emissions that were disclosed, more than half of them did not pass the “reasonable” test. It appears that some electric generation utilities are not properly reporting the emissions associated with business activities, their true “climate friendliness”. It is also difficult to compare the GHG emissions across companies within the electric generation sector, due to the inconsistencies in the emissions calculations.