North America CEO, William Theisen, looks at reporting landscapes in the US and Canada to help companies prepare for mandatory reporting on their net-zero strategy.
The world is changing fast. The pace of climate change has been increasing over the last decade, and the impacts from climate change are expected to accelerate. Since the Intergovernmental Panel on Climate Change (IPPC) released its first publication in 2014, the global urgency for climate action has been more apparent, paving the way to global measures like the Paris Agreement in 2015. More than just a political commitment at its inception, this Agreement provided a framework for achieving net-zero carbon emissions by 2050.
Many countries followed this framework and created mandatory climate reporting to establish transparency amongst private and public companies regarding weather-related risks, GHG emissions, and net-zero transition plans. Countries such as the UK lead the way with mandatory reporting frameworks like the Streamlined Energy and Carbon Reporting (SECR) legislation, covering UK energy usage, and Mandatory Greenhouse Gas Reporting (MGHGR) covering at a minimum Scope 1 & 2 reporting. While North America has been slow to catch on, increasingly we are seeing organizations take crucial steps on climate risks via voluntary reporting frameworks like CDP and the GRI to better prepare themselves for approaching mandatory reporting requirements.
For North American companies still in the early stages of disclosure or yet to fully calculate their Scope 1, 2, and 3 GHG footprint, it is now time to prepare for impending mandatory reporting. However, with this preparedness is also an opportunity for internal stakeholders to better understand their business and its climate risks, to identify ways to adapt to a changing environmental and business context, and to ensure operational and business resiliency.
Step 1: Understand the current reporting landscape in North America
Many publicly traded companies in the US and Canada are looking to voluntary frameworks such as CDP or the Task Force on Climate-Related Disclosure (TCFD) recommendations on what types of information and data are relevant to report. Investors, such as Blackrock, continue to be the key driver for companies to disclose climate related information as they are looking to ensure that the companies are prepared to adapt as impacts become more apparent as the climate changes. The increased investor driven disclosure on publicly traded companies has amplified with the increasing importance of scope 3 emissions, as suppliers are being requested to disclose climate related data to ensure resiliency of supply chains.
These investor-lead voluntary reporting frameworks are an opportunity for businesses to disclose their emissions, to show their commitment and to learn about their own processes and challenges so they can make informed decisions about the next steps. For companies to be able to take meaningful action on climate change, they need good data about the impacts of their business activities on the environment. Voluntary reporting provides the framework in which this data can be disclosed so that investors can assess whether a company is managing their business to be resilient as climate impacts continue to become more consequential.
In addition to voluntary frameworks, we are also seeing an increasing number of steps being taken in the last year alone to accelerate climate action.
The Canadian government released its latest federal budget, which included mandatory reporting of climate-related financial risks for all federally regulated financial institutions from 2024. This new ruling will require Canada’s financial sector to analyze and understand its climate risks and opportunities. This is a pivotal move to start building reporting systems in Canada.
In the US, while the recently passed Inflation Reduction Act (IRA) does not include requirements for companies to report on carbon footprints, the IRA creates an enabling context when set against the backdrop of the impending SEC ruling with various incentives, such as tax breaks for emission reduction investments. In essence, with the initiatives set in the inflation reduction act, companies should be enabled to take advantage of these incentives to reduce their footprint. We expect to see an uptick in American private sector companies setting ambitious carbon reduction targets as a result.
Step 2: Understand what mandatory reporting is coming
One of the most significant climate announcements of 2022 in the U.S. was from the Security Exchange Commission (SEC), declaring their much-anticipated corporate climate ruling will finally be released in April 2023. This new ruling is expected to require companies to provide information about their emissions in their annual reports and stock registration statements and disclose certain information on climate risks. Our SEC guide provides you with a summarized breakdown of requirements.
The EU Corporate Sustainability Reporting Directive (CSRD) entered into force in January of this year. It requires large and listed companies (except listed micro-enterprises) to publish regular reports on the social and environmental risks they face and how their activities impact people and the environment. The CSRD applies to both public and private organizations in the EU but also to non-EU companies with a net turnover of €150 million in the EU, with at least one subsidiary or branch in the union, as well as companies with securities listed on a regulated market of any Member State. Therefore, companies worldwide with this level of business coming from European sales must report on how sustainability impacts their business and how their activities in turn affect people and the planet.
Step 3: Prepare for mandatory reporting with existing guidance and frameworks
Whether it’s the SEC or another mandatory reporting framework, we can expect the information required to be aligned with existing reporting frameworks and there are essential steps that companies can follow to prepare. Broadly, we expect the focus to be on two main pillars: Climate Risk and Carbon Footprinting.
Carbon Footprinting is essential to your company’s journey towards net-zero. Gathering data from various sources helps you understand risks and opportunities. Most frameworks ask for Scope 1 direct emissions and Scope 2 indirect emissions plus all material Scope 3 emissions. Because Scope 3 emissions involve multiple stakeholders (i.e., third-party vendors, suppliers, manufacturing, etc.), they can often be the most impactful but also the most challenging because they are outside the organization’s direct control.
When it comes to Scope 3, there are multiple ways to calculate these emissions from using spend-based emission factors, to using solely primary data. Although primary data is more accurate, this can be more challenging to gather throughout the value chain. Alignment on methodologies for calculating Scope 3 emissions is lacking throughout the private sector, which makes it difficult to compare two companies operating in the same sector. The expectation is that mandatory reporting will require more companies to disclose their carbon footprints, which will lead to a significant increase in data availability across the board (one companies Scope 1 & 2 is another company’s Scope 3 and vice versa). It’s expected that with mandatory reporting, companies will be less comfortable with supplying estimates and will aim to be as precise as possible when reporting their carbon footprint.
Climate risks are classified into two major buckets – physical and transition risks. Physical risks include climatic events, such as wildfires, storms, and floods. Transition risks result from market forces changing in a low carbon economy. Reporting frameworks like that of the Task Force on Climate-related Financial Disclosures (TCFD) are set up to help organizations future-proof their businesses by understanding the impact of climate change on their organization, improving their disclosures and strengthening their strategies. This information is crucial for investors to ensure investments are resilient to climate change. Companies must then integrate these into the enterprise risk management (ERM) process and evaluate climate risks like other ERM risks.
Step 4: Start developing your net-zero strategy so that you can future-proof your organization
In order to keep up with the fast-paced and constantly evolving landscape of climate reporting, companies must start to build their net-zero strategies today. Building a robust strategy will equip your organization with a necessary foundation for the future of climate-reporting.
EcoAct has designed a unique and thorough framework that we use in our approach to helping clients achieve net-zero. Beginning with planning for zero by understanding your climate impact, then forecasting for zero by building confidence in your strategy and creating an overall goal with both near-term and long-term commitments.
Our objective is to help companies build robust strategies aligned with existing frameworks so that your organization will be better prepared for whatever mandatory reporting comes your way.