As US regulators get closer to finalizing their emission disclosure requirements, companies are scrambling to establish a compliant reporting regime that avoids double counting emissions
The Greenhouse Gas Protocol (GHP), which is the most mainstream method of calculating carbon emissions used by companies today, provides a standardized approach for measuring and reporting emissions. Developed in 1998 by the World Resources Institute and the World Business Council for Sustainable Development, the protocol now is widely used by governments, industry associations, nonprofit agencies, and corporations worldwide.
The Carbon Disclosure Project estimates that Scope 3 emissions account for an average of three-quarters of a company’s emissions, according to the World Resources Institute. “Other studies show that the supply chains of eight sectors account for half of the world’s [greenhouse gas] GHG emissions and provide evidence that Scope 3 emissions from energy-intensive industries are increasing faster than their Scope 1 and 2 emissions.” Indeed, counting Scope 3 emissions is of paramount importance.
Variations in carbon emissions regulations make reporting murky
In the U.S., the Securities and Exchange Commission (SEC) mandates the disclosure of Scope 1 and Scope 2 emissions. According to the United Nations Global Compact, Scope 3 emissions account for approximately 70% of the average corporate value chain total emissions and are 11-times higher than Scope 1 emissions. Under SEC rules, Scope 3 emissions are only required to be disclosed if they are material or if the companies have Scope 3 emission targets. Currently, around 7,000 publicly traded companies are covered by this regulation.
By contrast, the Corporate Sustainability Reporting Directive (CSRD) in Europe is much broader. It includes 49,000 medium and large companies, covering all private and public companies with at least 500 workers. The European regulation affects more than 10,000 non-European companies, of which 30% are U.S. companies, according to data from Refinitiv.
Adding to the complexity of regulation is that specific rules within the regulation across countries and states or provinces can vary widely. As of August 2020, at least 40 countries required facilities or companies to measure and report their emissions periodically. With this list growing, it is good news that the GHP is the go-to resource for calculations and that additional harmonization of emission standards is ongoing.
Double counting not really a concern
When it becomes a legal requirement, accurate and homogenous collection, standardization, and reporting of Scope 3 emissions will be critical for both reporting companies and those using the data to make investment decisions.
Collecting data on Scope 3 emissions requires information from multiple sources, such as suppliers, customers, and other stakeholders, making it difficult to obtain accurate and reliable data. This affects the quality of the data, as it can vary or be incomplete or inaccurate. To combat this, companies may need to use multiple methods to collect data from various sources, which can come at a cost, especially for those with complex value chains.
While, as mentioned, the GHP has developed the corporate value chain accounting and reporting standard methodology for measuring and reporting Scope 3 emissions, one of the main criticisms around universal counting of Scope 3 emissions is the potential for double counting. This is because one company’s Scope 1 emissions are another company’s Scope 3 or Scope 2 emissions — and in some industries, the possibility exists for multiple companies to use the same supplier.
Collecting data on Scope 3 emissions requires information from multiple sources, such as suppliers, customers, and other stakeholders, making it difficult to obtain accurate and reliable data.
Double counting may occur when a manufacturer and a retailer both account for Scope 3 emissions resulting from the third-party transportation of goods between them. This only becomes problematic when claims are made that these emissions are offset with credits or provide a monetary value and when the same activity, such as the transportation of goods, is offset by another company. There are many other examples of double counting; for example, it may be acceptable to double count when a specific emissions goal is tracked over time and its progress needs to be reported.
Clear communication of reporting boundaries and emissions calculations can help identify potential overlaps and ensure that each company reports only its own emissions. This approach can provide a more accurate picture of a company’s carbon footprint and more fully support efforts to reduce emissions across the value chain.
Further, the GHP understands the need for additional clarification and is working towards the harmonization of U.S. and European disclosure rules. Additional guidance on this important subject is expected to ensure any double-counting concerns are alleviated.