This paper highlights the relationship between carbon accounting and assurance, focusing on the implications for investors and ESG raters. It shows that firms with assurance have a 9.5% higher carbon intensity than their peers. Moreover, when controlling for assurance, there is no evidence that Science-Based Target Initiative (SBTi) target-setters reduce future emissions. However, firms that obtain assurance reduce their future carbon intensity by 3.3%.

The authors recommend mandatory assurance of carbon reporting when it is mandatory and when reported emissions are largely relied upon in regulation. The findings of this research also call for portfolio managers and ESG raters to avoid taking reported carbon emissions at face value, as companies that do not obtain assurance for their reporting might use more favourable assumptions or omit key parts in their estimation of carbon emissions.

The paper recommends third-party assurance as the most effective way to ensure the accuracy of carbon data reporting. Furthermore, this study suggests that imputation methods might be useful for portfolio construction and aggregation purposes, but they shouldn’t be used for studying the underlying emissions phenomena. Stronger carbon reporting commitments lead to a reputational benefit and easier access to financial markets. As such, there is a case for longstanding investors to favour the engagement over divestment strategy and to show more active involvement in shaping corporate environmental strategies.

In conclusion, this important paper shows that mandatory third-party assurance is essential for ensuring the accuracy and reliability of corporate carbon accounting reports. For investors, the findings highlight the importance of looking beyond reported emissions at face value and understanding the reports’ context and assurance status.