This week, Mike Wallace, Chief Decarbonization Officer at Persefoni, shares how companies will be affected by the scope 3 ripple effect, how we’re already seeing this take shape, and what your organization can do to prepare.
The ripple effect of carbon information requests
The global push for carbon accounting and greenhouse gas (GHG) emissions reporting is at an unprecedented level due to a global value chain ripple that is causing numerous organizations to investigate their emissions. Not only are investors increasingly asking companies to measure, manage, and report, but companies are also turning to their suppliers to detail their emissions profiles.
Private equity firms are seeking carbon information from portfolio companies, and governments are seeking carbon information from regulated companies, as well as the companies in their own supply chain. This is only the tip of the iceberg as we wait for various proposed rules, legislation, executive orders, standards and reporting guidelines to be finalized and take effect. Most of these policies include requirements for scope 3 emissions, which has already proven to trigger a huge ripple effect on companies to measure their carbon emissions.
Why climate risk and opportunity management can signal good (or poor) governance
As organizations begin to realize they are someone else’s scope 3, influential stakeholders (customers, investors, lenders, insurers, regulators, etc.) will eventually come knocking and ask for GHG emissions numbers. Then, they will ask for proof of those numbers, as well as the strategy and governance for reducing those numbers and the risks associated with climate change. Why? Because climate resilience, carbon emissions reductions, a decarbonization strategy, and time-based goals are increasingly viewed as instrumental components of today’s modern corporate governance, and good corporate governance of complex issues is a sign of an organization playing the ‘long game’.
Scope 3 emissions present an opportunity for companies to reduce their emissions, exposure to climate risks, and in turn, reduce their indirect operating costs. This is significant to stakeholders, especially as scope 3 emissions can account for 75% of an organization’s total carbon footprint on average, according to CDP.
The ripple effect in action: US government suppliers
Using recent developments in the United States to make things a little more obvious, let’s use the government supply chain as an example of this. In 2015 an unprecedented list of suppliers to the US government was published on the White House Council on Environmental Quality’s website. This shocked many stakeholders in the field, including those public and private companies on that list. The initial Federal Supplier Greenhouse Gas Management Scorecard list came out in 2015 and received some pushback from many of the listed companies, especially those with a red dot (signifying a lack of GHG management). This is a snapshot of the top 10 suppliers by spend.
In 2016 the Scorecard was updated, enabling the public to compare the lists and the company's performance over time. The * indicates a change from the 2015 Scorecard.
The Scorecards were taken down during the last presidential administration, but corporate disclosure and improvements did not stop. Nor did the tracking that was being done by those involved in such information. On November 9, 2022 an updated version of the Scorecard was released with over 200 suppliers listed and several new columns added. Here are the top 10 by spend.
Couple this with the Biden Administration’s Proposed Plan to Protect Federal Supply Chain from Climate-Related Risks announced on November 10, 2022, and you have a very loud signal to all companies on this list – public and private – to prepare for GHG disclosure. It’s one thing for the SEC’s rule to influence disclosures from publicly traded companies, but the recently proposed Federal Acquisition Regulation for climate information from federal suppliers will create a massive ripple effect through the entire supply chain and subsequently the entire economy. Since everybody is somebody’s scope 3, there will be a ripple effect down through the tiers of suppliers. It’s this scope 3 challenge that is also creating the opportunity for all of us to finally get a handle on our numbers.
Tools to strengthen your approach to scope 3 emissions reporting
Last month, Climate Decoded published a primer on emissions data exchanges, and how they can play a pivotal role in enabling companies to enhance their reporting on scope 3 emissions by connecting you directly with your suppliers’ primary emissions data. These exchanges streamline the process of collecting data from suppliers, allowing companies to obtain accurate and comprehensive information about their carbon footprint throughout the value chain. By leveraging data exchange platforms, companies can establish a more efficient and standardized approach to capturing scope 3 emissions data from suppliers. This enables better tracking, measurement, and reporting of emissions associated with purchased goods and services, transportation, and other supply chain activities.
Such streamlined data collection processes not only facilitate compliance with emerging regulations and reporting frameworks, but also provide valuable insights for strategic decision-making. Through improved visibility into scope 3 emissions, companies can identify hotspots, prioritize emission reduction efforts, and foster more sustainable practices throughout their supply chains.
Earlier this month, Persefoni released Scope 3 Data Exchange (S3DX) for companies to engage directly with suppliers to gather auditable data requests, whether or not they are a user of Persefoni. With customizable request forms, companies can collect the climate information they need from their suppliers in a centralized hub to track and manage all supplier requests. With technology, collaboration, innovation; such as with this tool; and other initiatives such as the World Business Council for Sustainable Development’s Partnership for Carbon Transparency, organizations can more manageably increase the quality and auditability of their scope 3 emissions data – which will prove to be crucial as companies make progress on their decarbonization goals.
Climate & ESG News Roundup
ISSB Finalizes Sustainability and Climate Standards
Yesterday, the ISSB issued its inaugural global sustainability disclosure standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. These standards present a significant opportunity to catalyze comparable sustainability disclosures across the globe and create a common language for disclosing the effects of climate-related risks and opportunities to investors and other stakeholders. The ISSB standards are designed to be disclosed alongside financial statements, and have been created with the support of G7 and G20 leaders, the Financial Stability Board, the International Organization of Securities Commissions, investors, and business leaders.
Now that the standards are finalized, the ISSB will shift gears to promoting adoption by working with jurisdictions and companies. The standards were officially launched at the IFRS Foundation’s annual conference and will continue to be shared throughout launch events this week hosted by stock exchanges around the world, including New York, Frankfurt, London, Johannesburg, Singapore, and Santiago de Chile.
SEC updates their timeline for the final rule on climate disclosure
The U.S. Securities and Exchange Commission (SEC) has revised its timeline for finalizing the Climate Change Disclosure proposed rule, with an expected completion date now set for the fourth quarter of 2023. While the new date on the Regulatory Agenda indicates a rule could be expected in October 2023, we advise that companies be on the lookout for the final rule throughout the second half of this year. It is worth noting that these are estimated timelines for final action, and that they are not always closely followed in action.
Still, the revised timing provides additional time for the SEC to review public comments, address stakeholder concerns, and ensure the rule aligns with emerging climate reporting standards. Despite the delay in the adoption of the final rule, companies are already ramping up their carbon accounting capabilities today. Climate Decoded will closely monitor updates from the SEC.
EU Sustainable Finance Package
The European Commission announced on June 13 new guidance and amendments to current regulations in an effort to make sustainable investing more accessible and transparent. The Commission recognizes that current regulation can be dense and, at times, enigmatic. With this new package, they are hoping to facilitate capital flow into sustainable finance and make it easier for companies and investors to leverage regulations and guidance. The package includes an increase in the number and type of activities that qualify as “sustainable” under EU definitions. A new set of EU Taxonomy Criteria for economic activities has been approved, which include substantially contributing to one or more of the non-climate environmental objectives, such as pollution prevention & control and transition to a circular economy, to name a few. Amendments to the EU Taxonomy Climate Delegated Act to expand economic activities contributing to climate change mitigation and adaptation have also been adopted as part of this package.
Another issue the Commission has recognized is the lack of transparency and regulation among ESG rating providers, leading to a dysfunctional ESG ratings market. With the hundreds of agencies operating in the market, each with their own (often undisclosed) methodologies and data sources, stakeholders have almost no way of knowing who or what to trust. ESG ratings could be an extremely useful tool for financial institutions, asset managers, and other investors, but with the current lack of credibility within the market, this tool is rendered useless in identifying ESG-related risks and opportunities for these stakeholders’ investments. To solve this, the Commission is recruiting the European Securities and Market Authority (ESMA) to authorize and supervise the rating providers.
All providers will be required to submit an application for authorization, subjecting them to the rules governing their operations and ongoing supervision, including a mandate to employ processes and procedures that ensure the independence of their rating activities. Additionally, raters would be required to disclose their methodology to the ESMA, subscribers, and rated entities.
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