As regulators' climate disclosure rules come online, companies face a new urgency on how to collect and manage ESG-related data both internally and from their supply chains
Last March, the U.S. Securities and Exchange Commission (SEC) unveiled plans to enhance and standardize climate-related disclosures for investors, as part of a growing awareness of the importance of environmental, social & governance (ESG) issues among public companies.
The new disclosure rules would require listed companies to not only disclose risks that are “reasonably likely to have a material impact on their business, results of operations, or financial condition,” but also “to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2),” as well as certain types of GHG emissions “from upstream and downstream activities in its value chain (Scope 3).”
The 490-page SEC proposal was originally published with a target deadline of October 2022 for final rules. Following debates about aspects of the proposal such as the Scope 3 disclosures and the definition of materiality, as well as the fall-out from the Supreme Court’s June decision in West Virginia v. EPA that limited federal regulation of power plant emissions, the timeline for final rules have been pushed back.
However, given that most investors support the core tenets of the new disclosure rules, many expect that 2023 will see the rules finalized and an implementation process started. And in preparation for when that happens, ESG experts say, there are a number of steps that companies should take right now to make sure their data warehouses are in order and they’re reporting accurate figures when the new rules go into effect.
The time is now
Currently, there is a split between how companies are approaching the upcoming SEC rules, says Mark Evans, Director of Business Development, Sustainability Consulting at Sphera, an ESG solutions software firm. Some of the companies with whom Evans works have been tracking Scope 3 emissions for some time, he says, adding that those companies feel confident that they won’t have to change their procedures too much to fit with any potential regulations. “The proposed rules are more about transparency and disclosure than setting reduction targets,” Evans explains. “Many companies are already transparent around their scope 3 emissions.”
However, that feeling isn’t universal. Even if other companies may have the data siloed within their organizations, they don’t necessarily have the internal infrastructure to report efficiently or effectively. Evans notes. “They’re saying, this is completely overwhelming. We don’t have a team of experts who can just drop into this and pick it up overnight. So we have to invest in this: How do we start? What’s the simplest way, and where do we begin?”
R Mukund, CEO of Benchmark Digital Partners, suggests that the simplest way for many companies to address this challenge may not be to tackle the problem as a whole at all, but to “take this elephant, and break it into some component parts.” Mukund adds that companies “could do a lot of it through purchasing data, spend data certainly, and publicly available information” and should actively look to capture as much of their own data as they can before reaching out externally.
“You can do a bunch of stuff before you have to do that really heavy lift, because that last lift is a heavy lift,” Mukund says. “You can’t minimize how significant that lift is, to go out and reach out to suppliers, because you’re also being contacted for that same information if you are in the supply chain.”
Data standardization decisions
It also doesn’t help that much of ESG data remains unstandardized or in different styles or formats, although some manufacturing-heavy industries may be working on this solution already. During the pandemic, Mukund said he worked with his industry clients to formulate a pandemic-exposure tracking module for similarly situated companies. Evans also pointed to the chemicals industry’s Together for Sustainability initiative, launched in 2011, which recommends utilizing product carbon footprint data, from life-cycle assessments (LCAs), as the preferred method for calculating Category 1 purchased goods and services for Scope 3.
“But for many other sectors, there isn’t a common approach,” Sphera’s Evans observes. “And that in and of itself is a challenge, because the greenhouse gas protocol allows different calculation methods.”
Indeed, many companies use online calculators to generate a traditional input/output spend model that tracks emissions based on materials used, Evans explains, adding that, for example, a company that purchases X amount of steel for Y dollar figure, can determine a certain quantity of carbon dioxide output equivalent released.
“But the challenge here is that the spend-based calculation methodology is highly aggregated,” he says. “It’s the data behind the calculations that provides the value. I’ve seen datasets that are six years old, which is quite out of date given how electricity mixes are becoming greener, for example.” As such, it has limited business value, and “if you want to set a decarbonization pathway for your company, other than reducing your procurement spend, what else do you have left?” It can be a bit of a dead end, Evans notes.
“Supplier surveys are also hard to scale,” he says. “And any data you do receive is unlikely to represent complete cradle-to-gate emissions.” Companies should utilize LCA data wherever possible, which is far more granular, scalable, and actionable than these other approaches, he adds.
Reactive vs. proactive technology
For many companies, compiling these calculations will go hand-in-hand with adoption and utilization of technology. And certainly, the simplest way to track this sort of data — and the one many companies use — is simple spreadsheets. But Mukund believes those who rely on spreadsheets are acting more reactively to potential regulations than using proper proactive planning.
“When you’re reactive, the spreadsheet is the solution that appears to suit all objectives, because you pull out a spreadsheet, it sounds great,” Mukund says. “That is literally the most reactive response and approach you can have.” Unfortunately, spreadsheets become more like a blunt instrument that is used because it’s all you have, and you’re going to just try and beat the problem into submission, he adds.
More forward-thinking companies, however, aren’t relying on technology as their final solution at all, Mukund adds. Instead, ESG data should be thought of as a larger strategy — one that includes technology, but also a framework component for how to use the technology, as well as a people component to make sure the ESG data framework is being followed.
“Put together a framework and a strategy that says, here’s what my ESG program is trying to accomplish,” he explains, noting that the strategy should include the items that stakeholders and management care most about and how leaders are going engage their workforce and internal group, because ultimately this is going to be driven by what they accomplish.
That strategy requires forward-thinking, however, and even with delays, a final draft from the SEC may be coming soon. That’s why, even before the new SEC greenhouse gas disclosure rules are finalized, forward-thinking organizations should begin tackling their ESG data strategy now.