Corporations gear up for mandatory carbon disclosures
Around the world, there is an increasing push for robust carbon accounting, in which private firms would be responsible for tracking and reporting their own emissions of the life cycles of their products and services, among other climate-related data points. The required collection and reporting of such granular climate data is seen as an essential step in the fight to keep global warming within 1.5-2º Celsius above average pre-industrial temperatures, thereby avoiding catastrophic climate change.
Members of an international Task Force on Climate-Related Financial Disclosure (TCFD) includes Belgium, Canada, Chile, France, Japan, New Zealand, Sweden and the United Kingdom.However, in the United States, the future of climate disclosure mandates is a bit murky, thanks to an ongoing tug-of-war between policymakers and investors.
Last year, the U.S. Securities and Exchange Commission (SEC) released a 534-page proposal outlining a plan that would require publicly traded companies in the U.S. to report greenhouse-gas emissions associated with the energy that they consume as well as all emissions resulting from their operations. These estimates would then have to be independently certified to assure their veracity. “In some cases, companies also would be required to report greenhouse-gas output of both their supply chains and consumers, known as Scope 3 emissions,” the Wall Street Journal reported at the time of the proposal’s release. “An SEC official said most companies in the S&P 500 would likely have to report Scope 3 emissions. Companies would have to include the information in SEC filings such as annual reports.”
Unsurprisingly, the plan was met with some considerable pushback from the private sector, and heavyweight lobbying against the proposed rules is ongoing. As a result, the SEC has reported that they will likely be softening certain aspects of the proposed mandates, with an updated version of the proposal to be released sometime later this year. Nonetheless, the basic tenets of the proposal will remain the same, and publicly traded companies can expect to have to start accounting for their carbon in the near future.
“The SEC has no role as to climate risk itself,” SEC Chair Gary Gensler said to the U.S. House Committee on Financial Services earlier this year. “But we do have an important role with regard to ensuring for public companies’ full, fair and truthful disclosure about material risks.” Many companies are already doing this type of accounting to some extent to please investors who are increasingly concerned with environmental, social, and corporate governance (ESG) considerations, but the SEC seeks to standardize this data.
Indeed, many large firms in the U.S. are already preparing for increased carbon accounting and disclosure rules. But for other businesses wondering where to start, WSJ Sustainable Business recently released introductory guidelines for beginning carbon accounting based on advice from sustainability executives at Holcim, HP and Nestlé. “Carbon is not a new science,” says Benjamin Ware, global head of climate and sustainable sourcing for Nestlé. “Nobody should panic.”
The steps laid out in the WSJ Sustainable Business are, in simplified terms:
- Build expertise. Starting by hiring outside consultants to guide the process, companies should also work toward building internal capacity. Companies should not approach this through training existing employees, but through hiring graduates and postgraduates with environmental science degrees.
- Follow established standards. We may not have the SEC mandates in hand yet, but there are plenty of existing guidelines and standards that lay out more or less universal rules and approaches for basic carbon accounting.
- Start with the easier stuff. Businesses should start with the more concrete and easily tracked Scope 1 and Scope 2 emissions – direct emissions from operations and energy consumption.
- Work with suppliers to tackle Scope 3. Since Scope 3 emissions include those at all levels of the value chain (from cradle to grave) working with suppliers and consumers to track their own emissions can be a huge help for overall accounting.
Don’t rush to publish and audit. Companies should keep their first couple of years’ worth of emissions data internal to ensure that they’ve worked out all the bugs and that their methodology is scientifically sound and can stand up to scrutiny.
