It’s been nearly one year since California’s Climate Accountability Package was signed into law. This package includes the Climate Corporate Data Accountability Act (SB 253), which creates GHG emissions disclosure requirements for certain businesses operating in California. It also contains the Greenhouses Gases: Climate-Related Financial Risk Act (SB 261), which mandates reporting of climate-related financial risks for a larger number of companies that do business in the state. In the U.S., these acts mark an important milestone in the regulatory approach to corporations and their environmental impact.
California’s SB 253 is especially notable because it goes well beyond the climate-related disclosure rules issued by the U.S. Securities and Exchange Commission (SEC): SB 253 applies to private companies (as well as public companies) of a certain size and has a Scope 3 reporting requirement. While the implementation of SB 253 and SB 261 may be delayed, the state has long been considered an environmental leader and other states will follow.
New York offers a good example. Its Senate Bill S897A, if signed into law, will also obligate certain companies to report their GHG emissions, including their Scope 3 emissions. And New York’s proposed Senate Bill S05437 would mandate climate-related financial risk reports from certain businesses, similar to California’s SB 261.
In Illinois, HB 4268 would make Scope 1, 2 and 3 emissions disclosures mandatory for certain companies that do business in the state. Calculations must be made in accordance with the GHG Protocol Corporate Accounting and Reporting Standard and the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard.
There are also developments at the federal level, with suppliers to the federal government facing new disclosure rules. The proposed Federal Supplier Climate Risks and Resilience Rule, if enacted, will require Scope 1 and 2 emissions disclosures from contractors with USD 7.5 million to 50 million in federal contracts. Suppliers with over USD 50 million in contracts must report their Scope 3 emissions as well and establish science-based GHG reduction targets. Given the U.S. government’s status as the world’s largest buyer of goods and services, the number of suppliers affected would be substantial.
These are just some of the climate-related legislative initiatives underway in the U.S., and they contribute to a trend that businesses can’t afford to ignore: Scope 3 reporting rules are on the rise.
It’s true that Scope 3 reporting is not always compulsory for all companies that fall within the scope of a climate-related regulation. And sometimes, as with the SEC rules, these value chain emissions aren’t addressed. But larger companies that operate in multiple jurisdictions will not be able to avoid Scope 3 disclosure rules. In fact, EU businesses and non-EU companies with a significant presence in the EU should already be preparing for the Scope 3 component of the Corporate Sustainability Reporting Directive and its European Sustainability Reporting Standards.
In time, smaller enterprises may also need to disclose their value chain emissions. According to the GHG Protocol, Scope 3 emissions can constitute over 90% of a company’s combined Scope 1, 2 and 3 emissions, and investor pressure may eventually lead regulators to pursue Scope 3 emissions more aggressively.
Currently, if a company does business with an organization that has a Scope 3 requirement, that smaller company will need to supply its Scope 1 and 2 measurements to feed into the emissions calculations of its regulated partner. These smaller companies can advance their sustainability credentials by voluntarily measuring and addressing their Scope 3 emissions as well. In doing so, they would be building a reputation as a sustainability leader while preparing for possible Scope 3 obligations that could materialize later on.
They can certainly learn from the organizations that are currently considering how to measure their value chain emissions. After recently conducting a survey among corporate sustainability leaders, we learned that data collection presents one of the biggest challenges related to Scope 3 emissions measurement.
Businesses need to collect and aggregate accurate data from their value chain, but the entities that come together to form a company’s value chain are diverse, widespread and varied in their individual approaches to data management. While some businesses may be able to supply the data needed, others may not be able or as willing to do so.
Enabling accurate Scope 3 reporting is very much a part of Sphera’s mission to create a safer, more sustainable and productive world. We recommend breaking this complex exercise down into five components.
1. Data sources:
- Collect and validate your Scope 1 and 2 data from within the company.
- Document the methodologies to be used for Scope 1 and 2 calculations.
- Identify Scope 3 upstream and downstream activities, noting available data sources.
2. Data methodologies:
- Determine the Scope 3 calculation methodology, such as procurement-spend calculations, LCA data or supplier-specific product carbon footprint questionnaires (PCFs).
3. Integrate:
- Automate the flow of internal, LCA and PCF data into an integrated software solution, if possible.
4. Validate:
- Have your data sources verified and validated by a third party for those Scope 3 disclosure rules that require this.
5. Evaluate:
- Identify potential inaccuracies. Highlight hot spots for remediation. And update and automate individual contributors for improved accuracy.
The integration step, which is about the ability to streamline data collection and aggregation, can really make a difference. An integrated software solution can reconcile different data-gathering approaches and help you achieve a more granular view of your carbon footprint. And that detailed view provides the actionable information that leads to effective emissions reduction activity and sustainability progress.
To learn more, read our Scope 3 Report, which offers an in-depth look at reporting challenges and the solutions that have been developed to address them. And for more information on our Integrated Sustainability Solution or our Sustainability Consulting Services, I invite you to get in touch.
–Paul
Learn more about Paul Marushka.
