Securities and Exchange Commission Chair Gary Gensler is moving the market regulator closer to requiring carbon disclosures from companies as investor concerns about the material impact of climate change on financial performance continue to escalate.
Major companies, including Apple, are on board, with its vice president of environment, policy and social initiatives, and former Environmental Protection Agency Administrator, Lisa Jackson backing a comprehensive carbon disclosure requirement in April.
But in Gensler's recent outline of his thinking on how to go about mandating carbon disclosure, he made an important caveat: the SEC may still opt to not include Scope 3 emissions in any forthcoming regulation.
That's an indication of just how hard it is for companies to track all Scope 3 emissions, the greenhouse gas emissions of other companies in a company's value chain. But it is also an admission that if it's "code red for humanity" in slowing climate change, the corporate world has not come nearly far enough in recent decades in figuring out how to track carbon emissions through the entire supply chain. And that is a point of frustration for climate experts who have been working on science-based carbon targets, tracking and accounting for decades.
In a speech he gave in late July, Gensler noted that some companies currently provide voluntary disclosures related to what's called Scope 1 and Scope 2 greenhouse gas emissions. Scope 1 are the direct emissions from a company's operations, owned or controlled sources. Scope 2 refers to how corporations measure indirect emissions from purchased or acquired electricity, steam, heat and cooling. But Gensler noted many investors are looking for information beyond Scope 1 and Scope 2, to Scope 3. "Thus, I've asked staff to make recommendations about how companies might disclose their Scope 1 and Scope 2 emissions, along with whether to disclose Scope 3 emissions — and if so, how and under what circumstances," the SEC chair said.
Majority of industrial carbon emissions are Scope 3
That "whether to disclose" looms large because the majority of carbon emissions from industrial sources don't occur in what are called Scope 1 and Scope 2, but the Scope 3 emissions farthest away from a company's operations. Carbon Trust research shows that for most companies, Scope 3 emissions represent from 65% to 95% of a company's broader carbon impact.
But it would put the SEC in line with the existing GHG Protocol — which provides tools for businesses to track and calculate emissions — and advises all organizations to quantify scope 1 and 2 emissions when reporting and disclosing GHG emissions, while Scope 3 emissions quantification is "optional" even though it notes that Scope 3 emission sources may represent the majority of an organization's GHG emissions.
Being the largest source of emissions means Scope 3 is also the broadest opportunity for carbon reduction. And it implies that as more companies set ambitious targets for carbon reduction and the "net zero" goals in the decades ahead, there will be no way to hold them accountable if Scope 3 tracking and disclosure does not improve.
"Companies will eventually be held accountable for these targets, and they usually include Scope 3, so this has to be solved," said Cynthia Cummis, director of private sector climate mitigation for the World Resources Institute.
Other climate experts are even less confident.
"They are not ready for this," said Angel Hsu, assistant professor of public policy and the Environment, Ecology and Energy Program at the University of North Carolina, and founder of the Data-Driven EnviroLab. "It is frustrating and surprising," said Hsu, who worked on the GHG Protocol. "If companies are not reporting Scope 3 they are missing a huge part."
Apple and Exxon and carbon reduction
Apple's embrace of emissions reporting would include Scope 3, according to the company, though the statement was not explicit. ExxonMobil released Scope 3 emissions for the first time in 2021, but noted that the data "is less certain and less consistent because it includes the indirect emissions resulting from the consumption and use of a company's products occurring outside of its control." In disclosing the number — 540 million tonnes of CO2 from upstream production, to be exact — the oil giant took multiple digs at the accounting, also stating that "Scope 3 emissions do not provide meaningful insight into the company's emission-reduction performance and could be misleading in some respects."
Many companies are reporting to the level of Scope 3 already, and the standard has been available for roughly a decade. According to investor sustainability advocate Ceres, over 3,000 companies have reported Scope 3 under the Carbon Disclosure Project.
Some companies also have begun to develop their own approaches to Scope 3, and behind the scenes, they have questioned the approach from the "academics and NGOs" that developed the original methods, which companies worry could force them to push supply chain partners to change, rather than work in coordination to reduce their carbon footprint.
Climate advocates like Ceres aren't buying that, but say there is more work to be done across the many companies that don't report on Scope 3 yet.
"It does involve emissions outside of the control of a company in the supply chain and does require engagement with suppliers," said Steven Clarke, director of corporate clean energy leadership at Ceres. "And we do know suppliers, particularly small and medium-sized ones, are overwhelmed by requests from bigger partners."
One example is industrial giant Honeywell, which earlier this year announced its own Scope 3 carbon accounting and coordination project for its supply chain. The company also noted the effort provides an opportunity for it to sell its own energy efficiency products to the supply chain.
Ceres officials say the corporate-led approach is becoming more common, and not just within one company's supply chain, but among competitors, too. That has led to things like the Sustainable Apparel Coalition, with companies within a sector coming together on Scope 3 targets, acknowledging they don't know how to meet the requirements today but since they all use the same contract manufacturers and logistics providers, it makes sense to come together to develop technology and engage suppliers so they are not overburdened with surveys and questions.
"We are getting good ambitious commitments, but the realty is Scope 3 is a challenging area to measure and that puts people off," said Tom Cumberlege, who leads Carbon Trust's work on value chains. "What Scope 3 really means as far as a main effort is the gap between pledges and calculation. Once it is measured, we're only at the starting line of action." He added, "Retailers say they desperately need to figure out science-based targets, that customers are demanding it. It is definitely there and significant in the marketplace."
Net zero can't happen without changed supply chains
The efforts are increasing across sectors, too, with coalitions like Transform to Net Zero, in which Microsoft and Starbucks were among the companies that came together in 2020, and the Amazon-led Climate Pledge.
"The data is still hard to 'wrap their heads around' for many companies," said Clarke, but he added, "If you want to thrive in a decarbonized future, you need to address it."
Cummis noted it's not as if a ton of work hasn't been done already. There are 600 valid Scope 3 targets aligned with the GHG Protocol — she was part of the team that developed them. She is most frustrated that there is still an imbalance between the data and the demand, and it is one that has to be fixed for the carbon reduction targets that companies are issuing to be verified.
"We assumed 10 years ago we were creating demand for high transparency data and supply chains, and the companies would be willing to pay for the data and data providers would generate it, or trade groups," she said.
While the action is picking up from tech giants like SAP to start-ups like Persefoni, so far, Cummis said, third-party databases offering broad estimates for sectors and kinds of businesses are more common. "It is fine to get an estimate to understand a relative proportion of emissions by activity, but now we have targets and we have to track progress, and it is hard to use average emissions databases for that."
You don't even know if you're on a path to net zero without better data.Cynthia Cummis, director of private sector climate mitigation for the World Resources Institute
It is not a surprise to the climate experts that some companies are trying to figure out the best way to tackle Scope 3 on their own, and companies like Apple and Amazon and its Climate Pledge may be up to the challenge, but that also runs the risk of falling short of the collective action that will be required.
"Amazon wanting to lead on this would be great, because they cover so many product categories," Cummis said. "But whatever they develop needs to be fully open source so others can have access to the data as well. It will be a higher quality tool that's more usable if it's developed in partnership with other companies in the value chain, and not just at the retailer level."
Food, energy emissions climate challenges
Food companies are a good example of the challenge companies face. Their biggest emissions sources come from primary suppliers like farms where it is difficult to get data, and so they may not know what farms are buying and how to trace those inputs, especially when it comes to commodities.
In work it did with the GHG Protocol, Kraft found that 90% of its emissions were from the supply chain and at the Scope 3 level.
"If there were tools to support them, that would be helpful," Cummis said, "but the farmers need more incentives, and there are many middlemen in there too if they are buying commodities. It's not buying direct."
The oil and gas sector is one of the more stark examples of the Scope 3 issue.
According to Mike Coffin, oil & gas analyst at Carbon Tracker, 85% of the emissions from a barrel of oil come when transportation, such as your car, is driven. When you look at a company like ExxonMobil, Scope 1 and Scope 2 together are a minority of total emissions.
"We really look at if from that lens, and upstream oil and gas companies, whatever targets they do, need to be done on an absolute basis rather than intensity of operations basis," he said.
Companies from ExxonMobil to Royal Dutch Shell can reduce emissions intensity by adding renewables — which is becoming a bigger part of their climate strategy — or low carbon to the mix, but they are still providing the same amount of CO2 emissions.
"We think it's crucial that any goals have an absolute basis rather than just intensity basis, but getting their heads around that means producing less of their core product," Coffin said.
Occidental, seen as an early leader among U.S.-based oil and gas companies on carbon strategy, is still going to fall far short of the mark unless its most ambitious carbon capture technologies are proven.
"Say Oxy reduces emissions intensity by 50%, it's still just 50% of that 15% that is Scope 1 and does nothing for the 85%," Coffin said. "The planet doesn't care about how much energy is used, but reducing CO2, and that's why it is critical to have absolute targets," he added.
BP has said it will reduce emissions on an absolute basis, and that can only mean one thing: producing less oil and gas. "That's what we need," Coffin said. "Reducing Scope 3 for them is moving away from being an oil and gas producer and it's really the only option they have, just become smaller or do something else in renewables, or whatever. It doesn't matter, maybe give money back to shareholders."
The clock is ticking
Where the corporate world stands today in terms of carbon emissions disclosure is pretty simple.
Scope 1 and Scope 2 — a company better know. How much refrigerant it is buying and the electricity it is using, which they get a bill for every month, is the easy part.
Scope 3 remains complicated, but it could be solved faster if there was more effort. "It's a solvable problem," Cummis said.
But so far, even if more players, and some of the right players are stepping up, they haven't stepped forward fast enough.
"For too long we've said if the Apples, Walmarts, and Amazons support this it will happen," she said. "We've made great progress in getting companies to measure Scope 3 and set science-based targets, but there is a big gap in data quality."
Even if the net zero targets are laid out over decades, the clock is ticking today.
The real crunch time, according to Cumberlege, will come in the decade between 2030 and 2040, the net-zero goal for many companies, but which as a timeline makes him critical of what they are doing today to "realistically and programmatically" tackle the data challenge.
"Lots of companies have spent lots of effort collecting data and setting targets, but they are really only at the start of the race in terms of the effort needed on how data informs the decision-making and what the business would look like in a net-zero world and how to transform the supply chain to fit with that," Cumberlege said.
The near-term science-based targets need to be measured over a 5- to 15-year timespan, not 20 to 25 years, for companies to be on a path to net zero. "But you don't even know if you're on a path to net zero without better data," Cummis said.
Hsu is encouraged by the fact that the companies now reporting on Scope 3 are no longer the extreme exception to the rule. But the fact that most companies do not mention Scope 3 explicitly in net-zero commitments, and the fact that the total number of companies reporting Scope 3 is "nowhere near complete," leaves her concluding carbon disclosure will remain an area of major uncertainty.
Research in recent years from the Carbon Disclosure Project on companies reporting Scope 3 showed that even among this group, the data covered less than one-quarter of Scope 3 emissions.
Andrew Behar, a shareholder advocate and CEO of As You Sow, which has long led climate disclosure efforts among investors pressuring companies, and is involved in the Say on Climate initiative, says using the 2050 net zero target as an example — which is the timeline for many companies — means a net 50% reduction by 2030 because once the low-hanging fruit is taken care of, the percentage goals get harder to reach. "That means 5% every year for the next 10 years, and it means Scope 3, and they need to actually report that."
But he does see the message getting through at some big companies. A recent vote at GE to require net zero goals and Scope 3 emissions on products including traditional power generation, jet engines and wind turbines received 98% support, and the company announced last month it is moving forward with the plan. "It's real and they are going to do it," Behar said.
There is a chicken-or-egg issue among the broader set of companies in the slow pace of progress, which is part of what makes it challenging to solve.
"Part of the problem is we can't expect all the companies to follow through until all the data is available, and we can't get all the data until more companies disclose," Hsu said.
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