Part I: The gap is considerable
The climate reporting gap between private and public firms is tangible and large. What are the numbers telling us?
While it has usually been a fact well known that private firms’ reporting of the tracking and reporting of environmental impact trails considerably that from public firms, how much exactly is a rather alarming number. In a recent report from global non-profit CDP, running the world’s largest environmental disclosure system, the gap between public and private equity has been highlighted beyond all else.
About 13,000 firms (a third of which are public entities) report to the CDP on climate and environmental impact data. And yet, Bain& Co. reports “while the 4,400 public companies in CDP’s database cover 64% of global public market capitalization, the 8,700 private companies that report represent a tiny fraction of private market capitalization globally.”
Data from the CDP Climate Change 2021 research, analysed with Bain’s support, found that private companies are actually far less likely than their public counterparts to report greenhouse gas emissions. Only 49% of private firms report their Scope 1 and Scope 2 emissions – as opposed to the 88% public companies – and 29% their Scope 3 emissions, versus the 70% for the corresponding public cohort.
The gap exists in ambition as well. While 73% of public companies actively set emissions reduction targets, just 37% of the private enterprises do. Larger private companies (those with more than $100 million in revenue) perform somewhat better than smaller companies in this planning function. But still, only 51% of them reported setting any targets.
This, however, does not mean that private firms are ignoring the issue altogether either. Many have taken rather important steps towards formalizing oversight on their climate impacts – with 88% saying they now have at least one climate strategist and 70% with broad-level oversight.
Translating oversight into action, however, is a different story. Bain analysis on CDP research has found that “close to 70% of private companies say their strategy is influenced by climate-related issues, but only 44% have identified material risks related to their environmental impact (compared with 76% for public companies).
And though 59% of public companies reporting to CDP have put management incentives in place aimed at improving environmental impact, only 30% of private companies have done so. Based on current plans for implementing incentives, 81% of public companies will have such plans in place in two years’ time vs. 66% of private companies.”
The research clearly highlights how major the challenges for corporations are set to be. It goes without saying, to mitigate climate impacts will require major participation across both sectors in the global economy. Larry Fink, CEO of BlackRock spoke about how major moral hazard may also be involved in certain aspects, such as in companies avoiding costs associated with climate reporting and action intentionally taking fossil fuel-based assets private, and away from public scrutiny.
Bain writes: “consider that fewer than 10% of the public companies reporting to CDP in 2016 had gone private by 2021. But once they were in private hands, 85% of them had stopped reporting to CDP.” While it may be to an extent what Fink colorfully called “the biggest capital market arbitrage in our lifetime,” the reporting gap between public and private companies also stems from a mix of resource constraints, capability gaps, and a lack of urgency from leadership.
(Continue reading this article in Part II to learn about possible solutions)
Know more about our Top Ranked PGDM in Management, among the Best Management Diploma in Kolkata and West Bengal, with Digital-Ready PGDM with Super-specialization in Business Analytics, PGDM with Super-specialization in Banking and Finance, and PGDM with Super-specialization in Marketing.