Unless you work in sustainability, you may be unaware of a rule-making that the Securities and Exchange Commission (SEC) is working on around the disclosure of climate related emissions for publicly traded companies. In short, the SEC Climate Disclosure Rule is expected to require every company under their purview to disclose direct and consumed energy-related emissions – known as Scope 1 & Scope 2 emissions – and that companies of sufficient size and those with “material” levels also disclose the value chain-related emissions known as Scope 3. This rule was expected last month, so it could be released any day.
If you’re a cynic, it would be easy to dismiss the whole thing as political and subject to change with changing political leadership. But you’d be missing that the SEC rule is already approaching irrelevancy – 70% of affected companies surveyed by PwC stated that they are going to track emissions independently of whether the rule goes through or not. That includes companies like Anheuser-Busch InBev, Microsoft, General Motors, and more. Companies that aren’t included in the potential rule are also moving in that direction, too. Just in the past few days, outdoor recreation leader REI – a non-traded co-op – announced that it would measure the emissions from its supply chain and prioritize purchases from those who are reducing emissions. The famous auction house Christie’s has been doing it for years.
The cynic might want to further dismiss it and talk about that voluntary commitments are reversible. They would be right about voluntary commitments, but it would be ignoring that what is driving these commitments isn’t really voluntary. While all the noise of being against “woke” investing is being made by a few loud, well-publicized charlatans, thousands of investment professionals are quietly requiring environmental risk-disclosures from their investments. Simultaneously, staid regulators in the states that drive the US economy and in Europe are going beyond the SEC rule. The SEC is the lagging indicator here, not the leading one.
Ok. If you run a small business, you might be asking, “So what?”
Well, all of those large companies that are tracking their value-chain emissions are pushing their suppliers to track theirs. We help these suppliers at Aclymate in these supply chains already. And our list of customers is growing.
But how supply chain emissions are being tracked is changing. The whole concept of Scope 3 emissions is becoming out-of-date and its because the way we calculate Scope 3 is impossible. It is a top-down method that requires large, professional sustainability departments to estimate emissions for thousands of products. It is incredibly inefficient and expensive. You can look at how Walmart’s Gigaton challenge has largely stalled.
The only way to track and reduce emissions associated with supply chains is a bottom-up method. One that assigns emissions to products as they’re generated. One where suppliers are empowered to make decisions instead of being mandated to make reports. It will be a system similar to the E-Liability method advocated by Professors Robert S. Kaplan and Karthik Ramanna. And it will involve every company because it will become the new standard for work. Working on climate will be the table-stakes for selling to or buying from any other business, whether in manufacturing, professional services, finance, or elsewhere.
As I’ve said before, working on climate is strategic. It isn’t a question of ifyour business will need to track and reduce its emissions, it is a matter of when. If you wait, it will be more painful, and you will lose out on opportunities. You shouldn’t be asking, “So what?”, but instead “What am I waiting for?”
May 9, 2023
Click below to discover more Mike's Thoughts articles.