Simplify SEC Climate Reporting Using Spend Data
SEC Proposed Rules and Investor Pressure
Amidst the increased investor pressure for all businesses to disclose climate-related information, the Securities and Exchange Commission (SEC) recently introduced a set of new rules. The SEC rules are a response to increasing investor and employee pressure to improve firms’ environmental, social, & governance (ESG) performance. These require businesses to include climate-related disclosures, such as the governance, management, and material impact of climate risks, as well as publicly report direct and indirect greenhouse gas (GHG) emissions to allow investors to verify company claims and existing ESG ratings.
Publicly traded companies worth over $700 million are expected to report climate-related data to the SEC starting next year. How do companies lacking climate-related data infrastructure, in particular supply chain emissions, respond to new SEC requirements?
In the absence of an established GHG data infrastructure, your organization’s spend ledger could be an answer. Spend ledger is one of the few auditable datasets that most organizations regularly compile. Using the spend-based method, which has been used as an effective way to calculate GHG emissions and fill data gaps with methodology detailed by the GHG Protocol, a spend ledger can provide a good starting point. It helps see the big picture and prioritize the largest contributors for targeted improvement. Over time, average data can be replaced with primary data to improve the quality of GHG measurements.
Scope 3 Disclosure: Obtaining Full Coverage
Measurement and tracking are especially difficult for Scope 3, or indirect emissions (up to 90% of total emissions), with impacts associated with categories such as a company’s purchased goods and services, business travel, investments, waste treatment, and others. Even the largest companies are having difficulty keeping track of exactly what happens upstream and downstream of their direct operations because of all the suppliers, distributors, and customers to keep track of.
For example, Ceres, a sustainability nonprofit, assessed 50 of the largest food companies in the US and found that only 19 of them report their Scope 3 emissions. Similarly, JUST Capital evaluated almost 1000 companies and found that even though there is progress and the majority calculate their direct emissions by keeping track of data such as utility bills they already have on hand, only 12% of companies reported their emissions from all relevant Scope 3 categories.
With the new SEC rules, complete supplier engagement and data coordination will be very tough for those just starting out.
Prioritization
Given that upstream operations are a major contributor to the organization’s footprint, there is a growing demand to report the GHG emissions from the supply chain and identify which suppliers to focus on for emission reductions. Part of the new SEC rules contains reporting of emissions and creating a climate transition plan for more sustainable practices. To create a transition plan, organizations need to create a baseline and set goals for further reduction and refinement from that baseline. The EPA outlines the steps below on setting emissions reduction targets, and the first and most important step that leads to planning is the scoping and measurement of emissions.
Using spend-based, industry-average data allows the focus to go on the company’s bottom line and determine where its resources are spent and where the associated emissions and risks come from. Spend-based databases, such as the Comprehensive Environmental Data Archive (CEDA) provide emission factors per spend category, which allows the goals to be specific and measurable. This makes data collection for purchased goods much easier to track- all that needs to be done is to match the database spend categories with that of the organization's spend ledger. As more data is collected and refined down the road, the organization will be able to shift from industry average and spend data to primary data provided by its suppliers.
Finding these priority spend categories would also assist in developing scenarios, giving companies the confidence to stay on track with their goals, better understand the path that lies ahead, and allow the business to continue to thrive. The Task Force for Climate-Related Financial Disclosures (TCFD) outlines the general steps used to approach scenario analysis for climate disclosures applicable to GHG emission disclosures as well- relating emissions to a business’s materiality.
As a major driver of climate reporting is the implied risk of increased business and social disruption due to climate change, scenario planning would allow companies to assert control over uncertainty and evaluate those risks. But to identify those risks, the measurement and identification of driving forces within the organization is a necessity. The steps to achieve the goal of transparent and effective disclosure are similar: ensure proper governance strategy, obtain a baseline measurement, and develop actions based on the areas that may be most improved, taking scenario-based risks into account. This complete picture leads to a full climate plan with clear actions and priorities.
Future Outlook
The transparency the SEC rule requires would hold companies accountable for their role in climate change and give investors more leverage in forcing changes to business practices that contribute to rising global temperatures. The main issue for many of these organizations is data acquisition, tracking, and collection. Using an organization’s spending ledger as a starting point to measure and estimate emissions, identify the highest contributors, and find the risk points of the business would be helpful to those that do not yet have complete supplier-specific data on hand.
About CEDA
CEDA (Comprehensive Environmental Data Archive) is an extensively peer-reviewed suite of environmentally extended input-output databases first launched in 2000. CEDA is designed to assist corporate carbon accounting. CEDA Global launched in 2022 shows GHG emission factors for 60,000 commodity-country combinations covering over 95% of the global economy.
Written By:
Paul Rikhter
