Last year, we witnessed regulatory organizations become more specific than ever about how companies around the globe should report on climate accounting initiatives. There were many developments related to the Greenhouse Gas Protocol (GHGP), The Task Force on Climate Related Financial Disclosures (TCFD), the Global Reporting Initiative (GRI), and The Sustainability Accounting Standards Board (SASB).
Just as significant, the United States government took further action with the passage of the Inflation Reduction Act (IRA) with a major climate bill inside. In Europe, the Corporate Sustainability Reporting Directive (CSRD) became law on January 5, 2023. This coming April, we’ll get further guidance from the Securities and Exchange Commission on its March 2022 rules proposal including the definition of full transparency for carbon emissions and climate risks.
All of this regulatory activity can be summarized this way: a growing number of U.S. companies will need to gather a myriad of disparate data that contribute to climate action plans and their performance against those plans starting as early as 2024, on 2023 data. In Europe, the Corporate Sustainability Reporting Directive (CSRD) will require a 2025 report on 2024 data.
Consolidation between the reporting rules in different regions of the world is ongoing, and it’s far from finalized. This has made it difficult for many global organizations to understand exactly what to disclose—and also where and when. However, the time is now to begin building out a reporting infrastructure and create internal reports to identify data gaps and establish good processes. This begins with determining what data you need to support the reporting and how to gather it.
Align Data Gathering Efforts to Known Climate Accounting Reporting Standards
The most common data approach for carbon accounting should leverage Scopes 1-3 of the Greenhouse Gas Protocol (GHGP), which has been built into many international climate-monitoring agreements and first-generation ESG reporting standards. While approximately 90% of S&P 500 companies reported some type of environment, social and governance and GHG emissions information by the end of 2021, there was a high variance of information and some companies were accused of ‘greenwashing.’ We can expect company reporting expectations to become more scrutinized going forward, being more science-based and using industry and regulatory standards.
GHGP Scope 1 relates to direct emissions from sources that are owned or controlled by the company such as fleet vehicle emissions or electric power consumption. Scope 2 is indirect emissions at company facilities that generate energy bought and consumed by the company. Scope 1 and 2 data collection is well understood because companies have this information and data sources readily available.
In contrast, Scope 3 covers indirect emissions throughout an organization’s upstream and downstream supply chain. And in terms of climate impact, Scope 3 is the most important to consider. As evidenced by the CDP’s 2021 Global Supply Chain Report, there are 11.4 times more emissions in a company’s supply chain compared to its direct operations.
With the biggest potential impact to the carbon footprint also creates the greatest complexity in terms of data. Upstream emissions from the goods and services the company purchases produce different data sets than the downstream emissions from the consumption of their products. Calculating these emissions requires the use of two types of data:
- Activity data – a quantitative measure of a level of activity that results in GHG emissions such as liters of fuel consumed, or kilograms of material purchased.
- Emission factor data – a factor that converts activity data into GHG emissions data such as kilograms of CO2 emitted per liter of fuel consumed.
In addition, organizations can run into issues ensuring it is accurate and in the right format for consumption in a CRM, ERP or Climate Management Accounting Platform (CMAP). For example, a company may not have accurate Scope 3 calculations if suppliers in their value chain don’t accurately measure their emissions.
By far, Scope 3 will be the hardest data to gather and standardize. So it’s essential that you have good working relationships with your supply chain partners and suppliers so that each company can ask for the data they need and supply them to others. This data gathering is typically more complex and time consuming than what you currently share with them so our advice is to start now if you haven’t already, beginning with an ask for the data you need, and soon after, provide the Scope 3 target that you are trying to accomplish.