By Chris LeVeck Founder and CEO of Facility Innovations Group
Unlocking The Green Competitive Edge
Leveraging SEC's Scope 3 Emission Requirements for Sustainable Growth
Time has run out for companies that have procrastinated in face of SEC Scope 3 regulations governing carbon emissions reporting. The competitive landscape is shifting in favor of those that have taken proactive measures to embrace decarbonization.
For those just starting their decarbonization journey, new collaborative opportunities are emerging to help them get off the fence. Strong reporting protocols and concrete decarbonization plans offer opportunities for stronger partnerships, cost-cutting, and more resilient futures.
Scope 3 Emissions Explained
Scope emissions refer to the different categories of greenhouse gas (GHG) emissions generated by a company's operations. Scopes 1 and 2 cover emissions from direct and indirect sources, including emissions associated with its own operations and purchased electricity consumed by the company. Scope 3 accounts for all other indirect emissions from the network of interdependent suppliers and customers in the company’s supply chain, both upstream and downstream.
While the number of companies voluntarily reporting their emissions data, including Scope 3, has been steadily increasing for close to a decade, many have run into difficulties due to inconsistent accountability and a lack of standard practices.
The SEC and Why Scope 3 Emission Reporting is Inevitable
If Scope 3 reporting sounds like a challenge from a reporting perspective, you’re right. But in an increasingly carbon-conscious economy, grappling with Scope 3 reporting is an inevitability. They can account for a full 80% of a company’s emissions. Furthermore, standardization is putting widespread reporting within reach.
When the SEC introduced more concrete reporting requirements in 2021 in the hope of standardizing the process, it delayed the introduction of Scope 3, likely because it recognized the operational burdens it placed on public and private companies alike. Because Scope 3 emissions involve the entire supply line, the ripple effect is going to be felt throughout the supply chain.
Scope 3 Requirements Trigger a Cascade of Responsibility that Will Strengthen Some Partnerships and Weaken Others
A non-issue 20 years ago, reputational risks from supply chains are very real now. Companies higher in the supply chain are sharpening their strategies in response, which creates a ripple effect down the line.
Distributing the responsibility is a practical response to the Scope 3 reporting challenge, which is too large for even top-tier companies to lift on their own. (as apple found out in 2021?)
Private companies down the supply line are increasingly expected to do more than account for their own emissions. They need to follow best practices like those of companies higher in the supply chain, which means passing responsibility down the line by partnering with more sustainable suppliers of their own.
Consider some of the ways that responsibility for emissions reporting has cascaded down supply chains over the past five years and the new expectations and partnership dynamics that result:
With new SEC rules taking effect these dynamics will only get amplified. But they will also become more standardized and rote.
Key takeaway: The carbon-conscious market is increasingly one of collaboration and standardization.
Time’s Up: Scope 3 Reporting is Upon Us.
Several short-term changes regarding reporting and disclosure requirements can be expected, but to fully leverage these changes it’s important to see the big picture. The change will not abate, and reactive responses are limited. Even immediate needs should be best addressed as part of a long-term, comprehensive plan.
Break out the Spreadsheet?
Reporting software abounds, and there’s a temptation to attack the problem with spreadsheets. Forward-looking companies may rely on technology to help with reporting, but even when picking the right software, without a company-wide strategy these initiatives will remain unreliable and costly.
The Case for a Comprehensive Roadmap
Private companies down the supply line are increasingly expected to do more than account for their own emissions. The most appealing partners will be those that follow the same accountability best practices their partners are expected to higher in the supply chain. Why? Because it shares the heavy lifting and reduces reputation risk, especially for public companies of the value chain.
Distributing responsibility down the line creates promotes stronger, more sustainable suppliers, and partnerships, throughout.
Collecting and Reporting Data Companies that can report on their own emissions, direct and indirect, will be a better fit for businesses with their own Scope 3 obligations reporting will be the most important. To avoid duplicate reporting Scope 3 emissions categories are intentionally created to be mutually exclusive. And while most private companies can focus primarily on Scope 3.1 emissions, it depends on your business goals and those of the partners you seek.
Increase Transparency Companies would need to be more transparent about their carbon footprint and the steps they are taking to reduce it. Brand stewardship may become an increasingly important aspect of a private company's branding, which may include annual sustainability or corporate responsibility reports.
Setting Reduction Targets Companies may need to set targets for reducing their scope 3 emissions and disclose their progress toward meeting these targets.
Engage with Suppliers Companies would need to work more closely with their suppliers to gather data on the emissions associated with the goods and services they provide. You’ll benefit from their reporting and they’ll benefit from yours.
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2023 will see increased scrutiny of the reporting practices of many companies, public and private. Most companies, even companies that have already made some efforts to report emissions, still struggle to understand what this means for their business and what concrete steps are required. The article below is an effort to explain the advantages of getting off the fence and tackling the challenge head-on.