Although climate change is one of the most widely discussed ESG and sustainability issues, disclosing climate-related information is not the first natural step for healthcare companies to take as they start their ESG initiatives. In one of our previous ESG blog posts, we recommended that healthcare companies use the Sustainability Accounting Standards Board (SASB) standards to identify the ESG topics most relevant to their business. According to SASB’s materiality map for the healthcare sector, SASB has determined that greenhouse gas (GHG) emissions are not a priority for five out of the six industries within the sector. Healthcare companies often prioritize other ESG issues, such as Access & Affordability and Product Quality & Safety, because they are already factored into their existing policies and procedures.
However, investor demand for GHG emissions data has remained strong despite recent backlash against ESG, and the SEC is expected to finalize its climate disclosure rule in the coming months. The healthcare industry accounts for 8.5% of GHG emissions in the U.S., but the industry is relatively further behind others in addressing and managing climate issues. According to MSCI, only 6% of companies in the healthcare sector have set net-zero GHG emissions targets, which was the lowest percentage for any GICS® sector. However, large healthcare companies that have set ambitious net-zero goals are starting to pressure their suppliers and business partners to set GHG reduction goals of their own. For example, Pfizer expects its suppliers to set a GHG reduction target in line with the Science Based Targets initiative (SBTi) by the end of 2025.
As the expectations for healthcare companies on climate issues heat up, here are some basic steps that companies can take to start understanding and managing their GHG emissions:
Learn the Scopes
As defined by the Greenhouse Gas Protocol – the most widely used GHG accounting standard – an organization’s emissions sources are divided into three “scopes.”
Scope 1 emissions entail direct emissions from sources that are owned or controlled by a company. For example, Scope 1 covers emissions from natural gas used in company-owned furnaces and heating systems as well as emissions from company-owned vehicles.
Scope 2 emissions refer to the emissions derived from the purchased electricity consumed by a company. These are “indirect” emissions because the company’s electricity needs are supplied by utilities that emit carbon and other greenhouse gases in the process of generating electricity.
Scope 3 emissions cover all other indirect emissions that occur as a result of a company’s activities. For example, emissions from employee business travel and freight transport for supplies would fall under Scope 3 (as long as company-owned vehicles are not involved). The GHG Protocol further distinguishes Scope 3 emissions between “upstream” emissions, which involve emissions related to the manufacturing and purchase of products and services, and “downstream” emissions, which involve the distribution, use, and disposal of a company’s sold products and services. As a result, Scope 3 emissions often entail the bulk of a company’s GHG emissions. For example, Philips estimates that the customer use phase of their products (a downstream activity) accounts for 80% of its total environmental impact.
Collect the Data
Scope 1 and Scope 2 emissions are relatively easier to calculate than Scope 3 emissions because most (if not all) of a company’s natural gas and electricity usage data can be found in utility bills. We recommend that companies gather their utility bills for each of their facilities as the very first step in conducting a baseline GHG inventory.
Keep in mind that some Scope 1 emissions, such as gasoline purchased for company-owned vehicles, might not be captured in utility bills. Moreover, companies may lease office space in multi-tenant facilities where the tenant does not pay for gas or electricity individually. In this case, the GHG Protocol recommends that companies count the energy consumed in leased facilities (including on-site heat generation) as part of their Scope 2 emissions.
Many companies calculate and disclose their Scope 1 and Scope 2 emissions before addressing Scope 3. Calculating Scope 3 emissions is a more complicated exercise because it requires engaging with all the suppliers, vendors, and other business partners across a company’s value chain to gather accurate data. The GHG Protocol’s Scope 3 standard provides a standardized approach for companies to prepare Scope 3 GHG inventories in a cost-effective manner. However, given the complexity and time-burden of Scope 3 data gathering and management, many companies utilize external resources when developing GHG inventories across all three scopes. In recent years, a plethora of user-friendly SaaS tools have arrived on the marketplace to help companies manage their GHG data as well as other ESG information.
Align Disclosures with Industry-Leading Frameworks
Even if a company follows best practice standards like the GHG Protocol in calculating its emissions, investors and other stakeholders may expect them to disclose climate data in alignment with other industry-recognized frameworks. Moreover, ESG ratings agencies often evaluate companies based on whether their emissions disclosures follow these frameworks.
The TCFD (Task Force on Climate-Related Financial Disclosures) is one of the leading climate-reporting frameworks and is supported by over 3,900 organizations. The TCFD’s recommended disclosures are centered around four general themes: governance; strategy; risk management; and metrics and targets. Underneath these four themes, the TCFD has developed 11 specific disclosures for companies to discuss how they approach and manage their climate-related risks and opportunities. Like SASB, the TCFD’s goal is for companies to disclose consistent and comparable climate-related information, and it remains a voluntary standard. However, the SEC’s proposed climate-disclosure rule incorporates various elements of the TCFD’s recommendations.
CDP (formerly Carbon Disclosure Project) is an environmental data platform that scores individual companies based on the quality of their disclosures and overall environmental performance. CDP allows stakeholders to access a company’s self-reported environmental data and request information for disclosure. Companies with leading CDP scores disclose comprehensive strategies to manage their environmental impact, assess environmental risk, and improve their performance. CDP enables companies to report climate-related information in line with the TCFD’s recommendations, but CDP also asks companies to disclose information related to other environmental issues, such as water and deforestation.
The Science Based Targets initiative (SBTi) is the gold standard for companies that have set net-zero emissions pledges. The SBTi aims to help limit global warming to 1.5°C above pre-industrial temperatures by assessing and validating emissions reduction targets that individual companies set. To have their targets recognized by the SBTi, companies must follow the GHG Protocol to calculate their Scope 1-3 emissions. The SBTi has also developed a Corporate Net-Zero Standard to support companies in setting emissions reduction targets that can be validated by the initiative.
At Gilmartin Group, our dedicated ESG team helps companies gather and manage their climate data and has extensive working knowledge of sustainability evaluation criteria and reporting frameworks. Contact our team today if you are looking to evaluate or further develop your company’s ESG and sustainability practices.
Authored by: Patrick Smith, ESG Associate, Gilmartin Group