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February 13, 2024

In Charts: Regulatory change would improve emissions reporting

Emissions from factory, pollution
The percentage of private companies that report emissions is far higher in Europe than in North America, according to MSCI (Photo: Manfredxy/Envato)

Private markets in Europe lead the way on reporting their emissions, while North America lags far behind

Differing levels of emissions reporting by private markets across different regions underline the need for regulatory change, a blog by data provider MSCI argues.

Policymakers around the world are developing frameworks designed to increase greenhouse gas emissions reporting. In Europe, the Corporate Sustainability Reporting Directive, which entered into force at the start of 2024, requires companies to disclose Scope 1 and 2 emissions and, where appropriate, Scope 3 emissions.

However, progress has been slower in the US. The Securities and Exchange Commission proposed disclosure rules for US companies in 2022 that have yet to enter into force, but MSCI believes they could increase climate transparency and narrow differences between regions. It estimated that around 11 per cent of global privately held capital could be affected by the SEC’s proposed rule.

The percentage of private assets that report emissions is far higher in Europe than in North America, shows MSCI research. “Regional disparities due to differences in regulation and skewed sectoral reporting make for a difficult landscape in which to assess the emissions and climate-related risks of [investors’] portfolios,” the blog reads.

Although MSCI data shows that carbon-intensive sectors lead lower emitters on emissions reporting, the disparity between regions “makes regulatory changes to enhance emissions disclosures from carbon-intensive companies all the more urgent”, it says.

MSCI warns that there could be more pressure from investors for carbon-intensive companies to disclose their emissions, as investors seek to achieve their net zero goals. The rise of carbon-pricing schemes could drive up costs for high emitters, it adds.

There is a notable difference in the level of emissions reporting across sectors in private markets, with carbon-intensive sectors, including utilities and energy, dominating the space.

Indeed, the overall level of emissions reporting by private capital funds remains low. MSCI Private Capital Solutions data shows that from more than 58,000 companies in private capital funds, just 2.2 per cent reported Scope 1 and 2 emissions as of the second quarter of 2023. Private equity and private debt had similar low levels of emissions disclosures, at 4.5 per cent and 4.3 per cent of their respective net asset values. NAV represents an investment company’s total assets minus its total liabilities. 

Private debt’s emissions disclosures were, however, more skewed towards high-emitting businesses than those reported in private equity. In NAV terms, 25.5 per cent of the emissions disclosures in private debt were in portfolio companies operating in carbon-intensive sectors, while just 8.1 per cent of private equity disclosures were in carbon-heavy sectors such as energy, materials and utilities.

A service from the Financial Times