With the finalization of these rules projected to occur sometime in 2023 smaller organizations are learning the ropes of environmental reporting for the very first time, with SMBs (small and medium businesses) working to ensure they meet the Scope 3 requirements of their larger customers.
This blog answers the biggest questions and offers best practices for businesses on their first foray into greenhouse gas (GHG) reporting.
Emissions Scopes and ESG Defined
Before we can discuss the nuances of GHG reporting, it’s important to be familiar with some industry terms.
Scope 1 emissions: These are direct GHG emissions that occur from sources that are owned or controlled by a company. Examples include emissions from onsite combustion of fossil fuels, emissions from company-owned vehicles, and emissions from industrial processes.
Scope 2 emissions: These are indirect GHG emissions associated with the consumption of purchased electricity, heat, or steam by a company. These emissions occur as a result of activities that are not directly owned or controlled by the company but are related to its operations. Scope 2 emissions are typically generated by the utility companies that produce the purchased energy.
Scope 3 emissions: These are indirect GHG emissions that occur as a result of a company's activities but are outside its direct control or ownership. Scope 3 emissions include emissions from sources such as business travel, employee commuting, upstream and downstream supply chain activities, and the use of products sold or services provided by the company. These emissions are often the largest and most challenging to measure and manage, as they involve a wide range of activities across the value chain.
ESG: ESG (environmental, social, and governance) is a framework used to assess the sustainability and ethical impact of a company or investment. Environmental factors consider a company's impact on the environment, such as its carbon emissions or resource usage. Social factors evaluate the company's relationships with stakeholders, including employees, customers, and communities. Governance focuses on the company's internal structure, accountability, and adherence to ethical business practices. ESG criteria are used to measure the company's overall sustainability and responsible business practices.
What Are the New SEC Greenhouse Gas Disclosure Rules?
Registrants would be required to disclose their direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). If material or if the registrant has set a GHG emissions target that includes Scope 3 emissions, they would also need to disclose GHG emissions from upstream and downstream activities in their value chain (Scope 3). The proposed rules offer a safe harbor for liability from Scope 3 emissions disclosure and exempt smaller reporting companies from the Scope 3 emissions disclosure requirement.
These proposed rules do also provide for a phase-in period based on a registrant's filer status and an additional phase-in period for Scope 3 emissions disclosure. The disclosure requirements align with widely accepted frameworks such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.
FAQ: Greenhouse Gas Reporting for First-timers
Our company doesn’t have a carbon reduction strategy in place. Do we still need to disclose Scope 1 & 2 emissions?
Now is the best time to prepare your organization for emissions reporting.
With the SEC rules change, ESG reporting is becoming an even greater priority for companies that wish to attract investor interest. ESG reporting enables stakeholders to assess a company's sustainability performance, its alignment with environmental and social goals, and the effectiveness of its governance practices.
Companies that have not yet entered the ESG arena should take immediate action and conduct a full emissions inventory. This inventory will help companies identify key emissions sources and enable the development of a reduction strategy, as well as inform Scope 1 and 2 emissions reporting.
When should our business consider Scope 3 reporting?
There are several nuances around Scope 3 emissions reporting that require careful consideration on the part of the reporting organization.
The SEC reporting requirements for Scope 3 emissions include a phased approach with a compliance timeline dependent on the registrant's filer status. They also carve out reporting exemptions for small organizations. However, customers and investors may still ask for Scope 3 reporting from these exempted organizations.
Taking proactive action on Scope 3 reporting is the best way to ensure your organization is prepared for future industry demand and regulatory changes. There are also differences between common reporting frameworks, such as those offered by GHG Protocol and SBTi. That’s why consulting directly with others in your industry can help shape your organization’s Scope 3 reporting targets.
What role should CDP reporting play in our disclosure strategy?
Carbon Disclosure Project (CDP) reporting is a critical priority for organizations whose investors and customers require it, though voluntarily participating in CDP reporting has its own benefits. [Text Wrapping Break][Text Wrapping Break]This reporting provides an opportunity for companies to differentiate themselves from their competitors. CDP reporting is highly regarded by investors as it provides standardized and credible information on a company's environmental performance. By participating in CDP reporting, companies can demonstrate their commitment to sustainability, attract responsible investors, and potentially improve their access to capital.
How do we turn disclosed targets into action?
Setting targets is the easy part, knowing how you will achieve targets is the challenge. A Net Zero Transition Plan can map emissions sources to decarbonization measures and help a company plan for the capital expenditure required to meet their goals.
A Net Zero Transition Plan provides a roadmap for a systematic and structured approach to decarbonization. The plan typically includes a comprehensive assessment of the organization's current emissions profile, setting specific targets to reduce greenhouse gas emissions over a defined timeframe. It outlines the initiatives, actions, and investments that will be undertaken to transition to cleaner and more sustainable practices across various operational areas.
With new regulations looming, how do I measure my GHG emissions in line with regulatory standards?
The following considerations can help ensure your GHG emission measurements are in line with regulatory standards.
1. Utilize the GHG Protocol: The GHG Protocol is the most widely recognized standard for GHG accounting and reporting. It provides comprehensive guidelines and methodologies for measuring and reporting emissions. By aligning your measurement practices with the GHG Protocol, you can ensure compliance with major legislation in the USA and EU.
2. Consider Financial Control Boundaries: The SEC rule has indicated a preference for financial control boundaries over operational control boundaries. However, since most companies currently use operational control boundaries, it is advisable to wait for the final rule before making any changes. Keep an eye on updates and guidance from the SEC to understand their stance on this matter.
3. Assess Material Scope 3 Categories: The SEC rule, as currently written, requires reporting of material Scope 3 emissions. Conduct a Scope 3 screening to identify the areas within your value chain that have the most significant emissions impact and are material for disclosure purposes. This screening will help you pinpoint the relevant Scope 3 categories that need to be addressed to meet the disclosure requirements.
Start building your GHG reporting strategy with Antea Group’s Climate Change Advisory
