Verification, a crucial yet neglected element of carbon reporting
Only 1 in 5 companies undergo external verification of their carbon emissions. But what is it, how does it differ from assurance and why is it crucial to carbon reporting?
Verification is a vital component of carbon emissions disclosure that is not unlike the auditing process that companies undergo for their financial reporting. After measuring and disclosing their GHG emissions in tonnes of carbon dioxide equivalent (“tCO2eq”), companies can undergo independent verification by a third-party to review the data. The verification process primarily involves reviewing data calculations and documents and making educated guesses where appropriate, amongst other things, culminating in the provision of an “assurance”. This assurance comes in the form of a signed statement issued to the company from the third-party, confirming that the data submitted for verification (which may not be all the reported data) is in line with the relevant protocols and standards according to which it has been reported. The rigour of the assurance and the method used to verify the information depends upon the assurance level that has been agreed upon. There are several levels of assurance available, ranging from '“Limited”, which verifies in the negative sense by confirming there is no evidence to suggest that the information disclosed is not materially correct, to “Reasonable” and “Absolute”, which is extremely rare. The most common of these levels, by far, is limited, followed by reasonable.
The different types of assurance available. Limited is by far the most common, followed by reasonable.
Above: the features of the two most common assurance levels.
Source (text): BDO
Verification doesn’t necessarily include all reported data
In a study carried out by Carbonary of data from over 1900 major public companies, around 2/3 had obtained assurance for their Scope 1 emissions. However, when it came to Scope 2 emissions, this percentage was considerably smaller. It is also important to note that companies have the flexibility to choose which categories they report within Scope 3 as long as they justify their choices. As a result, the third-party provider only reviews the categories that have been reported, but not all of the 52% of companies that underwent verification of their Scope 3 had reported it in full (there are 15 categories in total).
Left: % companies obtaining assurance, per industry group.
Considering all the companies that have undergone verification, some industry groups have performed better than others. Notably, Real Estate Management & Development is the leading industry group with a verification rate of 42%. Interestingly, its counterpart within the real estate sector, Equity Real Estate Investment Trusts (REITs), has one of the lowest verification rates at just 15%. Companies in Banks and Financial Services, due to their inherent risk aversion nature, show a higher inclination towards actively seeking third-party audits for their emissions data (39% and 35%, respectively).
Assurance levels denote the rigour of verification
Out of all the companies that have undergone verification, around 9% have attained a reasonable level of assurance, which is a more reliable, if not more costly, level of assurance than the more common limited level.
Left: % (of the companies undergoing verification) that obtained reasonable assurance, per type of carbon emissions. Scope 3 is less likely to have undergone verification of the same rigour than Scope 1.
These companies have distinguished themselves from those that fail to verify, or even report, their carbon emissions, showcasing their commitment to full transparency. They serve as leaders in climate action and instil investor confidence through their full awareness of carbon emissions in their own operations and along their value chain. Companies that obtain less rigorous and reliable levels of assurance should aim to raise their standards, ensuring that the data they have disclosed is completely reliable. The study carried out by Carbonary indicates that obtaining reasonable assurance for Scope 2 market-based emissions and Scope 3 emissions is somewhat rare. Companies that have not yet undergone verification or have only done so for some of their emissions should strive to ensure all their data is verified.
