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Greenhouse gas (GHG) emissions reporting is vital for investors looking to track the progress of companies reducing their GHG emissions, for example, in relation to a net zero target or a sustainability-linked bond issuance.
However, for investors to be able to track the progress of companies over time, it is important that emissions data can be compared across years.
This raises the question of how emissions should be reported when a company undergoes a significant structural change, such as an acquisition or a divestiture.
Fixed base year method — Emissions are reported relative to a base year that does not change. For example, a company that uses this method will report emissions relative to a set base year of (e.g., 2018)
Rolling base year method — Emissions are reported relative to a base year that changes/rolls each year. For example, a company that uses this method might report emissions relative to a base year two years prior to the reporting date
The choice of method will affect how GHG emissions figures are reported in each year following the structural change and, therefore, the method selected should relate to the business goals and the particular context of the company. However, the fixed-base year method tends to be preferred. Most emissions trading and registry programs, for example, require a fixed base year policy to be implemented.
Fixed base year method:
Under the fixed-base year method, when a company makes an acquisition, emissions sources from the acquired company are included both in the emissions of the base year and the following years. This is to normalise emissions data so that that emissions can be compared across years.
Similarly, when a company makes a divestiture,emissions sources from the divested company are excluded both from the emissions of the base year and in the following years.
Example: the case of an acquisition at the start of 2021 (base year=2020):
Emissions of the parent company and acquired company:
Emissions reported by the parent company in 2022:
Emissions reported by the parent company in 2023:
In the above case, emissions for the acquired company are included in the 2020 emissions figure for the parent company so that emissions can be compared between 2020 and 2021.
In the graph below, the orange line shows the consequence of reporting emissions for the acquired company without recalculating emissions for previous years, whilst the blue line shows the consequence of reporting emissions after recalculating emissions for previous years using the fixed base year method.
Reporting emissions for the acquired company only when it is controlled by the parent is misleading as emissions jump between 2020 and 2021, due to an acquisition, rather than poor emissions performance. Reporting emissions using the fixed base year method is, therefore, a significant improvement as emissions are normalised over time.
The rolling base year method:
Under the rolling base year method, emissions are reported relative to a base year that changes/rolls at regular intervals. Therefore, unlike the fixed base year method, the rolling base year method excludes emissions data from years when the parent company did not control an acquired company. Similarly, it excludes emissions data from years when the parent company controlled a divested company.
Example: the case of an acquisition at the start of 2021 where the base year is 2 years prior to the current reporting year.
Emissions of the parent company and acquired company:
Emissions reported by the parent company in 2022:
Emissions reported by the parent company in 2023:
For the year of the acquisition (i.e.,2022), emissions from the acquired company are not included for that year or the previous year, even though the parent company controlled the acquired company. However, in 2023, emissions from the acquired company are retroactively included for all years.
Notice that the base year is 2021 and so data from 2020 is excluded from the emissions data reported in 2023. This might come as a benefit to some companies as it means that the calculation of total emissions (emissions of parent company + acquired company) is only required for one year when the acquired company was not under the parent’s control (2021), rather than two years (2021 and 2020) had a fixed-base year method been employed. This may be beneficial as calculating emissions figures for an acquired company two years before it came under control could be complex, time consuming and expensive.
Which method is better?
The fixed-base year method is more popular and generally is seen as the better method for two main reasons:
The fixed-base method is less confusing when it comes to inter-year reporting. Under the fixed-base year method, historical emissions and emissions during the acquisition year do not vary depending on the reporting year. However, as illustrated above, under the rolling base year method, reported emissions figures for the year of and year following the structural change vary according to the reporting year.
A fixed base year method has the advantage of allowing emissions data to be compared over a longer time period than a rolling base year approach, as under the rolling base year approach, emissions data from before the base year cannot be reported.
At 9fin, so that users have access to the most up-to-date information, we regularly update historical emissions figures to reflect a company’s structural changes, reporting figures based on the methodology each company selects.
We also report original emissions figures alongside the updated figures. For example, if a company divested a portion of its business in 2021 and we updated our emissions figures for 2020 to take this into account, we would still report the original emissions figures for 2020 in our data tables’ details column so that investors can access all relevant emissions data.
9fin reached out to Crown, which informed us that the discrepancy came from the fact that they recalculated emissions for 2020 (in the 2021 Sustainability report) using the fixed-base year method to reflect the divestiture of its European tinplate business in 2021.
Prior to the divestiture, the data that 9fin was using for 2020 emissions came from the 2020 CDP report , however, after we noticed this discrepancy, we updated our 2020 data to reflect the structural change. We still, however, included the original 2020 figures within our details column.
Had 9fin not noticed this discrepancy and failed to update emissions for 2020, we would have reported a 27% reduction in total emissions between 2020 and 2021, rather than a 12% increase in total emissions.
