In light of the Securities Exchange Commission’s (SEC) proposed rule changes in March 2022, many mid-size and large companies face new greenhouse gas (GHG) reporting requirements. Businesses will have to account for their carbon footprints in three categories: emissions they produce, Scope 1; those they emit indirectly by what they purchase in energy from others, Scope 2; and GHGs, which entities outside the firms’ control but within their supply chain like vendors or suppliers make.
The task daunts many executives. In a 2022 Reuters Insight Sustainability Survey conducted among 516 international respondents between August and October, 79% said they were somewhat or very concerned with their Scope 3 emissions. Many multinational businesses have faced reporting requirements since 2022, yet requirements are becoming more stringent with each iteration.
How Can Companies Improve?
Chief Information Officers (CIOs) and Sustainability Officers (CSOs) are facing problems with data quality, management, and transparency. The right supply chain management software can help them address all three issues. Scope 3 reporting represents an essential data set because, for many companies, those emissions over which they have so little control may represent as much as 80% to 95% of their organization’s carbon footprint.
The first problem many corporate officers face is data quality. Engaging with vendors and suppliers should provide the highest quality data for Scope 3 reporting. Yet, as businesses gear up to understand their GHG emissions, some have inadequate histories or records to account for their production. In those cases, with the supplier’s cooperation, there are three possible ways to tackle the challenge.
The first method involves sending a comprehensive survey to vendors, asking them for detailed information about their GHG emissions. As mentioned, data obtained this way is valid only if the vendor knows and tracks their carbon footprint. Maintaining the database becomes extremely resource intensive if a company has hundreds or thousands of vendors.
The second technique calculates emissions based on vendors’ procurement spending. Even using online algorithms, this calculation lacks accuracy because it doesn’t account for variations or efforts toward reducing GHGs. Critics widely pan this method because of inaccuracy.
Using product life cycle assessment (LCA) data to calculate emissions constitutes the third and potentially most accurate approach because it quantifies an item’s materials, energy, and waste discharge and their impacts over the life of the process, product, The International Organization for Standardization (ISO) governs the methods for applying these calculations.
LCA is the most accurate and flexible technique, but it may require the most internal resources to build and maintain the database. Still, using environmental, social, and governance (ESG) software optimized for supply chain management could optimize costs.
Why Are Accuracy and Accountability So Important?
Scope 3 reporting remains somewhat controversial in the US, perhaps because the US pulled out of the Paris Accord (PA) in January 2017, returning to the pact in January 2021. Yet, several US-based companies have already joined the UK and several EU nations in Scope 3 reporting because they are part of supply chains that require their participation to keep their customers.
Importantly, major international financial institutions back the PA’s requirements. As investors, they evaluate compliance as one criterion of whether businesses are reasonable financial risks. So even without regulatory enforcement, large corporations face economic incentives to comply.
As mentioned above, Scope 3 emissions constitute the majority of most firms’ output. To make tangible headway toward net zero carbon goals, companies must accurately identify, quantify, and reduce those GHGs.
Accurate reporting allows businesses to evaluate their carbon footprints and realistically design plans for reduction. However, accuracy and transparency may also save companies from a public relations nightmare. Scope 3 inaccuracies may lead to accusations of “greenwashing,” defined as a company making unsubstantiated claims that its products or processes are environmentally sound to deceive customers or investors.
To that end, advocates for Scope 3 reporting have adamantly called for standardization in terminology and calculations. Those seemingly minor differences can cause glaringly divergent results in calculations, leaving firms inadvertently open to charges of greenwashing.
The Financial Stability Board (FSB) created the Task Force on Climate-Related Financial Disclosures (TCFD). That entity has worked with the International Sustainability Standards Board (ISSB), created by the International Financial Reporting Standards (IFRS) trustees, to standardize terminology and methods.