My emissions are less than your emissions How much GHG's does your organization emit?
My emissions are less than your emissions: how much GHGs does your organization emit?
Peter Forrester November 22, 2022
Introduction This week, activist shareholders were successful in forcing Costco to quantify its greenhouse gas (GHG) emissions and to develop a plan to reduce them. The resolution was made earlier in the year, and called for Costco to “adopt short, medium, and long-term ‘science-based’ greenhouse gas emission reduction targets. These should be inclusive of emissions from its full value chain, in order to achieve net-zero emissions by 2050 or sooner, and to effectuate appropriate reductions prior to 2030.” Despite a recommendation from the Board not to adopt the resolution, it passed with 70% shareholder support. This week, Costco committed to set new targets by next year to reduce GHG emissions. (Reuters, “Costco to set new emission cut targets in deal with activist firm,” November 16, 2022, link).
We are witnessing rapidly increasing pressure on companies to disclose credible, complete, and comparable GHG emissions by the shareholder and investment communities. It does not matter whether that pressure is motivated by sentiments of saving the planet or through protecting corporate value (aka profits) by ensuring climate-related risks are addressed. The pressure is real and increasing rapidly.
Not to be outdone, regulators are also increasingly coming to the emissions reduction party, albeit at a regulator’s pace. The U.S. Securities and Exchange Commission (SEC), Canadian Securities Administrator (CSA), and the Office of the Superintendent of Financial Institutions (OFSI) all have proposals out involving making certain climate-related disclosures mandatory, and more is expected.
What do investors and regulators want? Almost every government in the world has signed onto the 2015 Paris Agreement to curb global temperatures to well below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C. To achieve this, GHG emissions must be halved by 2030 and must reach net-zero by 2050. And as was highlighted ad nauseam last week at COP 27, we are way behind on achieving these targets.
There is a call for government and businesses to set “science-based reduction targets.” By “science-based” we mean aligned with the Science Based Targets Initiative (STBi). STBi is a partnership between the Climate Disclosure Project (CDP), the United Nations Global Compact (UNGP), the World Resources Institute (WRI), and the World Wide Fund for Nature (WWF). STBi’s mandate is to drive ambitious climate action in the private sector by enabling organizations to set science-based emissions reduction targets.
The process on its face is relatively straightforward. Your organization commits to STBi its intent to set a science-based target, it works with SBTi to develop a reductions target in line with climate science, it submits a target and publicly communicates the target, and it reports its emissions reduction progress annually. And as with Costco, this applies to emissions across the organization’s supply chain.
Of course, the elephant in the room is that this must all start with an understanding of what your organization is emitting today. To date, many organizations have not even commenced this task because the current regulatory reporting requirements do not apply to their business. As we see with Costco, the challenge with saying you are going to achieve your target by reducing X amount of GHG emissions every year requires you to know how much your business activities are actually emitting now, and therein lies the challenge – many companies have not done the work to determine what their baseline emissions are today.
Where to start with understanding your business’ emissions? Eventually, as evidenced by the International Sustainability Standards Board confirming in October that it will require Scope 3 GHG emission disclosure requirements, companies will be required to disclose their own direct GHG emissions (Scope 1), their indirect GHG emissions (Scope 2), and the upstream and downstream emissions (Scope 3) across their value chains. For clarity:
Scope 1 emissions include direct emissions from a company’s owned or controlled sources. This includes emissions from company facilities including energy used, combustion from boilers and furnaces, and fleet vehicles.
Scope 2 emissions are indirect emissions not owned or controlled by a company. This includes emissions from purchased energy, such as electricity purchased from a utility.
Scope 3 emissions include all direct emissions that occur across a company’s value chain, including upstream and downstream sources. Essentially, these are upstream emissions that are utilized in producing a company’s business or services, and the downstream emissions from customers using its products and services.
The global standard framework for measuring and managing GHG emissions from both private and public sector operations is set out by the Greenhouse Gas Protocol. The GHG Protocol was established in 1998 from a partnership between the World Resources Institute and the World Business Council for Sustainable Development. It has established the Corporate Accounting and Reporting Standard, which provides the accounting platform for virtually every corporate GHG reporting program in the world.
Determining Scope 3 emissions, and reducing them, is without a doubt going to be a monumental challenge for most companies. But as every journey starts with a few small steps, emissions targets and reductions start with a solid understanding of what your Scope 1 and Scope 2 emissions are today. The sooner companies can have a credible and complete baseline of their current emissions, the quicker they can make and report on progress toward reductions.
What does establishing Scope 1 emissions involve? There is a well-defined process for identifying and accounting for Scope 1 emissions (Scope 2 emissions, being tied to energy use, are somewhat easier to quantify). The process involves the following:
Establish the organizational reporting boundaries. Consider things such as what corporate entities and assets are to be included and what are the geographical limits of the operations and facilities.
Within those established boundaries, identify the GHG emission sources for Scope 1. This includes identifying sources and scope allocations, including stationary, mobile, process, and fugitive emissions.
Collect emissions data and define calculation methods. There are a number of acceptable approaches including direct measurement, mass balance, and emission factor use.
Utilize the GHG Protocol to conduct Scope 1 emissions calculations. There are a number of well-established calculation processes and tools that provide consistent and credible results. While not mandatory, this may include a results verification process.
Report results to company management to develop the emissions target-setting and reduction strategies aligned with the company’s sustainability and Environmental, Social and Governance (ESG) strategy.
Are you ready for what’s coming? Pressure from many different stakeholders will continue to increase for companies to understand and report their Scope 1, 2, and 3 emissions. While we cannot predict the exact timing of additional regulatory requirements for such reporting, it is only a matter of time before the regulations are in place. In the meantime, companies that have a solid understanding of their Scope 1 emissions will be well positioned to meet investor and regulatory demands. Perhaps more importantly, they will have a head start in having data to assist in understanding the risks and opportunities related to climate-change and the energy transition. This in turn can lead to a competitive advantage. So hopefully you can answer the question: “How much do you emit?”
Sustrio ESG Advisors helps educate businesses on climate-related reporting, understand the international reporting regimes, perform scenario analysis, and produce quality, data-driven disclosures relevant to investment and financial markets.Our services include dedicated engineering resources for calculating emissions pursuant to the GHG Protocol. Connect with us to see how we can help your company navigate the energy transition and report on all your ESG matters.