Preparing for Climate Disclosure: Where Companies Can Start

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Last week, Patrick Smith, Gilmartin’s Head of ESG Advisory and Green Project Technologies’ Founder and CEO Sam Stark had an in-depth conversation about the state of climate disclosure regulation today and what companies can do to gather and prepare their greenhouse gas (GHG) emissions data.

Click here for access to the replay of the webinar.

The ABC’s of GHG Accounting

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, such as natural gas used in company-owned facilities for heating. Scope 2 emissions refer to the emissions derived from 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 3emissions cover all other indirect emissions that occur as a result of a company’s operations, such as employee business travel and use of sold products. 

For most companies, a majority of their emissions fall under Scope 3, yet this data is the most difficult to collect. Companies just starting their efforts should try to calculate their Scope 1 and Scope 2 emissions first, which can largely be accomplished by gathering data from utility bills, company-owned vehicles, and refrigerant use. Companies should also track their spend data and map their various business activities to the emissions categories defined by the Greenhouse Gas Protocol.

For certain healthcare companies, one industry-specific challenge to keep in mind is laboratory plastic waste. Nitrile gloves, pipette tips, and other lab materials made from plastic are derived from petrochemicals and factor into a company’s Scope 3 emissions. As a result, even a clinical stage biotech company (with no commercial products available yet) could have potentially significant Scope 3 emissions depending on how much plastic they use in the lab.

Investor Pressure for Climate Data

Historically, companies have been pressured to disclose climate-related data by investors that have integrated climate data and other ESG metrics into their investment processes and risk management procedures. GHG emissions are often a key focus of investors and other stakeholders because companies are able to quantify their baseline emissions more easily than other ESG metrics. While the  most energy intensive industries and largest companies have been tracking their GHG emissions for years, investors are now requesting emissions data from across their portfolios. As a result, many SMiD cap companies have also begun disclosing this information. Moreover, climate disclosure is being integrated in the private markets, with private equity firms increasingly pushing their portfolio companies for climate information.

Evolving Regulations

Regulation covering climate disclosure is evolving at a fast pace. In the U.S., the SEC floated its climate disclosure proposal in the Spring of 2022, but it has yet to be finalized. However, California Governor Gavin Newsom signed two bills into law this October that establish GHG emissions disclosure requirements for thousands companies that operate in the state.

The SEC disclosure rule will only apply to public companies, with various tiers of disclosure based on the size of the company. The SEC proposal draws from the Task Force on Climate Related Disclosures (TCFD), a best practice climate disclosure framework. The SEC has received more than 16,000 comments on the proposed rule, and according to SEC Chair Gary Gensler, a primary area of concern in the comments was the disclosure of Scope 3 emissions, as well as the rule’s implementation timeline.

On the other hand, California’s laws will apply to both public and private companies that conduct business in California and generate a certain amount of revenue. Senate Bill 253 requires companies with over $1 billion in revenue to disclose their Scope 1-3 emissions, while Senate Bill 261 requires companies with over $500 million in annual revenue to disclose their climate-related financial risks. Like the SEC’s proposal, California’s laws are inspired by the TCFD’s recommended disclosures.

Across the Atlantic, the European Commission has adopted its own set of sustainability reporting standards for companies to adhere to. Under the Corporate Sustainability Reporting Directive (CSRD), every business in Europe, including U.S. companies with significant operations in Europe, have to report their Scope 1-3 GHG emissions.

Business Partners Looking Downstream

Beyond investors and regulators, companies are also being pressured by their key business partners to measure and manage their GHG emissions. In the healthcare space, large biopharmaceutical companies have set ambitious climate commitments, which requires them to work with their downstream suppliers and partners to help calculate their Scope 3 emissions. Some biopharmas have integrated climate-related expectations into their contracts with smaller business partners, and procurement teams are increasingly involved in sustainability due diligence processes.

This pressure affects both public and private companies – most of Green Project Technologies’ customers are private companies, which are also receiving climate-related questions from their larger business partners. Newly public and late-stage private companies should start tracking their climate data sooner rather than later while their overall footprint is small and data is easier to collect.

How ESG SaaS Providers can Help

Software tools like the Green Project platform can help management teams conduct carbon accounting projects in weeks instead of months. Green Project partners with tens of thousands of utility providers to help companies automate data collection and eliminate the risk of costly errors done through manual calculation. The Green Project platform reduces the difficult and time-consuming work of mapping emissions data to popular reporting frameworks such as CDP, EDCI, TCFD, and others. After calculating their emissions, companies can partner with ESG experts like Gilmartin to interpret the data and craft climate and ESG-related disclosures for investors, business partners, and other stakeholder audiences. 

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 & Tamsin Stringer, ESG Advisory, Gilmartin Group

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