HC Insider Insights - Commodities Companies Raise Their Game on ESG Reporting & Verification
Category: Insights

Commodity Companies Raise Their Game on ESG Reporting & Verification

The outcome of COP26 in November 2021 is having deep implications for producers and suppliers of commodities who are under pressure to reduce their carbon footprint whilst remaining profitable businesses throughout the value chain. Specifically, companies must navigate persisting uncertainties when it comes to reporting and verifying their environmental impact. This is bringing another layer of risks and costs, adding to the effects of the global coronavirus pandemic, higher oil prices and reduced investments on commodities’ supply chains, according to environmental specialists at a recent online event organised by Reuters on the repercussions of COP26 on the commodities sector.

ESG-rating agencies

As a prime example, commodity companies are having to invest more capital and resources in reporting and verifying their carbon footprint in the absence of a standard methodology for the evaluation of their carbon footprint. Speaking at the Reuters webinar, Tasneem Krueger-Vally, CEO of KruegerVally Consulting, said that the industry has seen the proliferation of several rating agencies providing a range of sustainability indices, which are key for socially responsible investors as well as for the process of investments into sustainable projects. However, because agencies offer different indices for different aspects of sustainability performance (from social aspects to governance), companies are faced with data gaps and assumptions when generating environmental social and governance (ESG) ratings, she said. Other challenges include the differences in the scoring systems, as each rating agency presents their results and indices in a different structure.

This lack of information makes it difficult for companies to carve a strategy path as well as to select tangible targets for sustainable investments. In addition, considering the significant growth of investment in the sustainability arena, the push for high-quality, transparent, and comparable reporting has never been greater, she added. Therefore, this is likely to result in more mergers of ESG-rating agencies with different methodologies in the short to medium term. This should evolve into a more baseline and standardized ecosystem for ESG ratings, Krueger-Vally predicted.

However, in the meantime, there is growing pressure on companies to disclose their carbon footprint and wider sustainability performance. Greg McNab, Partner at global law firm Baker Mckenzie, stressed at the webinar that measuring their own environmental impact is a relatively new task for companies. It involves new cost overlays, as well as extremely time-consuming processes that add to business-as-usual activities. “Companies have to get it right. They have to measure these things. They have to back them up. They have teams of people for reporting, and [with] all these different metrics, it is difficult to take on more than one scheme of reporting,” he added.

Tracking data

Digitalization and data tracking & analysis have become key tools to bridge information gaps, not just to gain better visibility on carbon emissions, but also to be able to execute better-quality trades and deals. Such tools have become vital especially for small and medium-sized enterprises (SMEs), as risks and costs related to the energy transition are filtering through the value chain. SMEs can be disadvantaged because they do not always have the capital and teams to tackle the scale of such data analysis tasks.

Companies like London-based start-up CarbonChain have been tracking the carbon emissions of customers along the value chain, as well as automating their carbon accounting. Adam Hearne, the company’s CEO said at the webinar that CarbonChain tracked and modelled 60% of the world’s carbon emissions including across oil and gas supply chains, transport and other logistics mechanisms. “We need to democratize this information for the benefit of the entire supply chain and for the ecosystem,” Hearne said.

In 2021, CarbonChain saw a growing price differentiation on the market for green products that were not officially launched. “The markets were differentiating the suppliers based on their green credentials and a premium did occur for that,” he added. “We can help a customer with their activity on a single transaction level, [ whether] it is good or bad, and be the simple referee of that. That’s a great step forward for the market and that’s why some banks are willing to take some bets on action and reward them.”

Pragmatic approach

In addition to the benefits of capturing historical data, carbon accounting tools boost companies’ capacity to make proactive decisions and forecast trades including for offset trades, which remain expensive, Hearne added.
Against this backdrop, and with sustainability now a top-of-mind concern at companies’ executive and board levels, players have adopted a pragmatic approach to reduce their carbon footprint across different regions and markets which are at varying stages of their transition journey. “I see customers allocating their low-carbon products to the right customer regions or to the most optimized customer regions based on where they are in their [transition] journey,” Hearne said. “If you do have a supply of low-carbon metal, you want to target that in Europe, where there is a carbon border coming up and you are looking at managing your tax position. Conversely, […] if there is a higher-end emission intensity, you want to send it to Southeast Asia.”


Supply chain managers need to spread the costs of reducing their carbon footprint as evenly as possible, especially considering the high cost of offsets currently, Hearne said.

When it comes to offsets, in addition to high costs, the issue of greenwashing remains a risk for companies. This was addressed during COP26 along with other key themes. “COP26 went a bit of a way in terms of carbon markets, of the rulebook to unlock the market and non-market approaches, on climate change and mitigation, [and] to address greenwashing in the offset market, because lots of people had the impression that it was allowing polluters to pollute,” Krueger-Vally said. “Hopefully now this mindset has changed, especially when so much time was allocated to minimizing the risk of double counting. Everybody knows how long those negotiations were at COP26”.

There has been a lot of compliance standards and sustainability labels to address the issue of greenwashing, she said, citing the ICC Framework for Responsible Environmental Marketing Communications which is now being updated to provide guidance on various environmental claims. Other relevant institutions include the International Capital Market Association which has specific guidance for green finance and green bonds for instance. Krueger-Vally also cited key policy and advisory frameworks that set the terms for investment that can be classified as environmentally sustainable, such as the EU Taxonomy and the UK Green Taxonomy.

However, “what would give greater credibility for people to be more confident is if there were some sort of third-party verification of the adoption of these compliance standards,” she stressed.

Hearne said that there are “many definitions of a net-zero deal going around”. A growing number of commodity companies are setting up ESG desks or building a carbon emissions team to be able to capture relevant data and future-proof headlines, he said. “But also, the market activity that is generated out of verified carbon accounts is really interesting to us. Once companies know what their emissions are with primary data, they feel a lot more comfortable in investing in the offset they know they are not over-accounting, or don’t worry about greenwashing. That is a market we hope to see more of, especially after COP26,” he said.

For McNab, the issue of greenwashing is not new, and has always been a challenge for companies’ legal teams. But he noted that some steps in the right direction were taken at COP26, like the creation by the International Financial Reporting Standards Foundation of a new International Sustainability Standards Board (ISSB) to develop globally adopted sustainability disclosure standards. - FS