How to Get Ahead on Climate Disclosure Mandates
by Natalie Vezina
It’s been almost a month since the Securities and Exchange Commission (SEC) released a 500-page proposal that would require public companies to disclose their greenhouse gas (GHG) emissions. Since then, there has been a flood of news content about what this would mean for reporting companies. Despite this overwhelming response, there may be some lingering uncertainty about what to do next to ensure your company is well-positioned to meet these disclosure requirements.
No matter where your company is in its sustainability journey, there has never been a better time to get a handle on your carbon emissions. Whether you’re stepping into this space for the first time or want to continue leading the pack, below is a decision tree to help advance your path forward.
Novice - We’re ready to get started!
Congratulations! Your company is about to measure its carbon footprint for the first time. Quantifying GHG emissions can lead to a plethora of benefits including increased efficiencies, reduced energy costs, and happier customers. This first run is all about defining the boundary and establishing a baseline. Here are three simple steps to get started:
Develop an Inventory Quality Management System – An Inventory Quality Management System (IQMS) is a framework for compiling an accurate, complete, and consistent GHG inventory. It is the instructions or “how-to” guide for ensuring your GHG calculations are repeatable and quality controlled. To get ahead of disclosure requirements, the procedures outlined in the system should comply with the Greenhouse Gas Protocol. Feeling confused? The EPA offers two great resources (a checklist and a template) on their website to help simplify the process, or you can engage with a consulting company like Foresight to put together your IQMS for you.
Collect Scope 1 & 2 energy data – After the IQMS has been developed, the next step is to gather fuel data for your Scope 1 and Scope 2 emission sources. (Scope 1 emissions are direct emissions from sources your company owns or controls, and Scope 2 emissions are indirect emissions from purchased electricity.) To automate the process and avoid problems with manual entry, invest in energy management software today. Spreadsheets were a good place to start years ago, but they are no longer cutting it. By linking your utility accounts to an energy management software, your data will be uploaded to a cloud-based platform in real-time. This not only saves time and money but also transforms the way a company understands its data by providing higher-quality visuals and reports.
Calculate and report Scope 1 & 2 emissions – The hard work is over! Now that you’ve collected your energy data, your Scope 1 and 2 emissions are ready to be quantified using the processes outlined in the IQMS.For reporting purposes, there are two aspects of GHG performance to consider: a) the absolute quantity of total emissions released into the atmosphere and b) a ratio indicator that normalizes emissions by a specific business metric (e.g., net sales).While absolute emissions inform a company's overall impact, normalized emissions better evaluate performance over time. Both metrics are of interest to the stakeholders and should be publicly reported to the Carbon Disclosure Project (CDP) or other disclosure platforms.
Emerging Leader – We have a head start but could use some help completing our Scope 1 & 2 GHG inventory.
If you've already begun calculating your Scope 1 and 2 emissions but are having trouble gathering data for 100% of your organizational boundary, do not get discouraged! Typically, companies will only gather 70-90% of their energy data during the first year. Emission sources that may be more difficult to quantify include mobile combustion, process emissions, and refrigeration use. If you haven't already done so, take some time to add these sources to your company's Inventory Quality Management System and determine an approach for collecting the data. Vehicle fuel data can be estimated based on miles driven, fuel consumed, or money spent on fuel. Refrigerant data can be estimated based on the square footage of the building, equipment type, or the amount of refrigerant purchased. There isn't just one way to quantify emissions, so use whatever data is available to you now and develop a system to improve data quality over time.
Once you have at least two years' worth of data (one base year and one performance year), aim to get your GHG emissions third-party verified. The SEC is likely to require filers to obtain some level of attestation and assurance to further strengthen the integrity of their disclosed information, so it's prudent to get ahead of this now.
Developing Leader – We’re ready to tackle Scope 3 emissions!
The SEC proposal features a phased-in approach that would require large accelerated filers to start filing their Scope 1 and 2 emissions in 2024 (using 2023 data) and Scope 3 emissions in 2025 (using 2024 data). The goal of this approach is to allow registrants more time to prepare for increasingly robust climate-related disclosures. If you’re already calculating your Scope 1 and 2 emissions and think you have plenty of time to tackle Scope 3 – you might want to think again. Scope 3 emissions are the hardest to calculate, so the earlier you can start, the better.
The easiest and quickest way to start calculating Scope 3 emissions is with a high-level screening assessment. Although there are 15 Scope 3 categories, not all of them are relevant to every company, so the first step is to determine which categories are “material” to your business. Next, you can use spend data from your accounting system to make an initial, rough approximation of your Scope 3 footprint and determine emissions hotspots.
To learn more about how your business can unlock the power behind Scope 3 emissions, check out this previous idea post here.
Strategic Leader – We’re already calculating our Scope 1, 2, and 3 emissions…what’s next?!
If your company is already calculating its total carbon footprint for 100% of its organizational boundary – congratulations! You're ahead of the curve. By now, you've gotten to reap some of the benefits of carbon accounting and are operating more efficiently.
While calculating carbon emissions is crucial to evaluating and reducing climate risk, disclosing them alone won't make a difference. Organizations must take steps to achieve net-zero emissions if we are to reach the goals of the Paris Climate Agreement.
Below are a few additional things your company can do to continue advancing your progress:
Disclose GHG emissions using the Task Force on Climate-Related Financial Disclosures (TCFD) framework.
Set a science-based GHG reduction target through the Science-Based Target Initiative.
Develop a carbon reduction strategy to meet your climate goals.
Engage suppliers in your climate strategy.
Inspire constituents to take climate action through employee or consumer engagement programs.
Lastly, it is important to note that sustainability is not all about reducing carbon emissions. Companies that solely focus on GHG emissions miss out on a myriad of opportunities to address other environmental and social impacts such as biodiversity loss, health, and resource scarcity. In addition to addressing GHG-related risks, we hope your organization continues raising the bar for all aspects of sustainability, emerging as a leader in your industry.
Disclosures and Beyond…
Standardizing GHG disclosures is an essential step toward mitigating climate risk. Although the approval of the SEC proposal remains to be seen, one thing is almost certain: investors are not going to stop demanding increased transparency from corporations. In fact, their sustainability-related demands are just getting started.
If your company is considering engaging with a consultant to help with its carbon disclosures, consider a consultant that can provide sustainability as a service. When you start seeing the opportunities behind carbon, you may also begin inquiring about life cycle assessments or utility rate optimization.
