Changing Regulatory Framework for Corporate Emissions ReportingBy Andres Friedman | Thu, 08/11/2022 - 10:00
As outlined by the Paris Agreement, to keep global temperatures below 1.5 C and avert the consequences of climate change, the world must reach net-zero emissions by 2050. To achieve these aggressive goals, large entities must define and implement radical action plans to reduce carbon emissions. According to the United Nations, over 70 governments and 1,200 companies have set clear emission targets to reduce their greenhouse gas (GHG) footprint and become carbon neutral. Global brands like Coca-Cola, Shell, General Motors, and Volkswagen are part of this list, driving change in sustainability across their value chain.
The Greenhouse Gas Protocol is an internationally recognized initiative looking to establish universally accepted GHG accounting and reporting standards. The five main principles of the standards published by the protocol include relevance, completeness, consistency, transparency, and accuracy. The Greenhouse Gas Protocol does not define the verification process and does not enforce the submission of the reports. Nevertheless, the initiative facilitates the process for corporations, nations, and other international entities that wish to set strict pollution levels and gather corresponding data to supervise emissions. A common standard makes it easier for businesses to record the data, simultaneously enhancing transparency, consistency, comprehension, and supervision for all participating entities.
The two standards are the GHG Protocol Corporate Accounting and Reporting Standard and the GHG Protocol Project Quantification Standard. As the title indicates, the former is a detailed guide for companies to quantify and report their emissions. The latter, which has not been published yet, will be a guide to quantify reductions from projects mitigating GHG discharges.
One of the most important classifications to accurately complete the reports is to differentiate the different types of emissions, classified as scope 1, scope 2, and scope 3.
- Scope 1: Direct GHG emissions. This type refers to emissions from sources that a company controls or owns. Some examples include carbon discharges from the company’s facilities and vehicles.
- Scope 2: Indirect GHG emissions from electricity. Includes the GHG emitted from purchased electricity used to power operations and equipment.
- Scope 3: Other indirect emissions. These include emissions across the value chain (upstream and downstream) and all other emissions that are not accounted for in scope 1 or scope 2. Some examples include purchased goods and services, transportation and distribution, business travel, and employees’ commute.
It is crucial to understand and include the three categories in GHG inventories because an exclusive focus on direct emissions may fail to acknowledge leading risks and opportunities for the company, resulting in a misconception of the actual correlation of the business to climate threats. For example, Scope 2 emissions are one of the major sources of pollution and, concurrently, a feasible opportunity for a substantial reduction in the company’s footprint. According to the UN, “The energy sector is the source of around three-quarters of greenhouse gas emissions today and holds the key to averting the worst effects of climate change.” Therefore, the shift toward renewable sources of energy is key for companies to reduce their emissions and mitigate global warming.
The concept of net zero, correspondent reporting standards, and the legal framework around GHG reporting are all in early stages, with many iterations to be made as processes and enforcement guidelines are defined. Nonetheless, companies making public commitments and shifting toward sustainable practices are positioning their businesses as pioneers in their industries, setting the example for competitors and other companies that have not adjusted their operational model. Corporate net-zero commitments not only reflect the company’s plan to contribute to the shift toward sustainability but also indicate a forward-looking business model that will operate smoothly in an environmentally conscious future. In short, corporate adherence to emission targets will influence the long-term success of the business. The growing consciousness of a society that is aware of the degrading impact of our consumption, production, and displacement patterns, will pressure entities worldwide to not only set clear targets but also to reach them. As investors are more environmentally conscious than ever, companies that fail to do so will have limited access to capital and cease to exist. Investors understand that climate risks can lead to financial risks for corporations. Therefore, to make informed decisions, they will certainly value, and even possibly require, visibility on the companies’ exposure to climate risks.
The U.S. Securities and Exchange Commission (SEC) recently announced a proposal for an emission reporting standard to be applied to public companies. It defines disclosure obligations of the climate risks related to the business (ESG today). Reporting requirements include the oversight and governance of climate-related risks, climate-related transition plan (a description of the plan, including the relevant metrics and targets used), direct GHG emissions (scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (scope 2), and indirect emissions from upstream and downstream activities in the value chain, if material (scope 3).
Companies that adopt a long-term perspective yet start acting now will be in a better position to adhere to this evolving regulatory framework. As stated in the GHG protocol reporting guide, “what gets measured, gets managed.” Net-zero commitments need to be followed by roadmaps to reduce these emissions. Regulations in the future will only get stricter and high emission levels may increase the company’s costs and reduce sales.
The good news is that, in Mexico, a “low-hanging fruit” is readily available for companies to reduce emissions: solar energy. Companies can reduce their scope 2 emissions significantly by adopting solar energy in their own facilities, and can reduce scope 3 emissions by incentivizing their value chain to also install solar panels. With zero-investment schemes available, companies have all the tools at their disposal to implement solar in their facilities. Just like in Germany, I see a future where all new buildings will come “solar-ready.”