The US Securities and Exchange Commission’s Scope 3 emissions proposal will not only affect listed companies – it’s going to have ramifications for their suppliers too.
As the world heats up and extreme weather events become increasingly common and destructive, governments are slowly waking up to the fact that something needs to be done to avert global catastrophe.
While most would agree that something should have been done much sooner, it now seems as though climate change is beginning to be taken seriously (finally!) in the upper echelons of power.
Public sentiment seems to be ahead of government in this regard. 2019 saw millions of people demonstrating across the world as they demanded urgent action to tackle global warming, uniting across time zones and cultures to take part in the biggest climate protest action ever.
Nevertheless, the big wheels of government are slowly starting to move, a fact evidenced by events like the COP 26 UN Climate Change conference held at the tail-end of 2021, the SEC’s proposed Scope 3 emissions disclosure announcement earlier this year , and most recently, the US Inflation Reduction Act signed just this month, which authorizes $369 billion worth of investment in renewable energy and reducing America’s planet-heating emissions.
These developments are undeniably good news for nature and the environment, in more ways than one. The Center for American Progress for instance, has indicated that the US Inflation Reduction Act will save families money, create millions of good jobs, and reduce pollution over the next decade, amongst other significant benefits.1
Furthermore, despite occasional pushback to these types of occurrences (the Supreme Court issued a ruling in June 2022 stating that the Environmental Protection Agency (EPA) cannot put state-level caps on carbon emissions for example2), and regardless of whether the Scope 3 emissions disclosure takes effect, interest in such disclosures from other key stakeholders (investors, lenders, the public, etc.) remains high.
As demonstrated by 2019’s mass protest action, public sentiment is already firmly in favor of pro-climate activity. Now, encouraged by consumer attitudes and/or mandated by legislative changes and new regulations, the business environment is becoming increasingly pro-sustainability and focused on ESG matters too.
Take the SEC’s proposed Scope 3 emissions disclosure announcement mentioned earlier for example. Although comprising four main categories, or ‘scopes’, greenhouse gas emissions are most commonly categorized by Scopes 1 to 3.
Scope 1 covers an organization’s own direct emissions, by its own facilities, or vehicles for example.
Scope 2 refers to those emissions generated in the creation of any electricity, steam, heating, or cooling being purchased or consumed by the organization.
Scope 3 includes all other indirect emissions that occur in an organization’s value chain. Or in other words, those emissions that it’s indirectly responsible for.
The upstream component means that the emissions generated in purchased goods and services, or in other words by suppliers, count towards Scope 3 emissions, whilst the downstream component means that all emissions resulting from products sold by the organization count towards Scope 3 emissions as well.
Although the SEC proposal would only apply to public companies, it’s worth noting that these businesses are often large, and comprise a significant proportion of the economy. Mandating their reporting activities with regards to Scope 3 emissions would have a significant knock-on effect on the extensive supplier networks of these organizations.
As a growing number of public companies begin to track their Scope 3 emissions, for their own reporting purposes they will increasingly require their value and supply chain partners to track their own emissions too.
Engaging with suppliers who cannot accurately provide their own ESG data metrics regarding carbon footprint and emissions will become a precarious proposition, and public companies will want to limit their exposure accordingly as a risk-management exercise.
Non-listed companies who do not track their emissions will find themselves under increasing pressure to do so, or face being excluded from a rising number of business and supplier networks and relationships.
When it comes to winning supplier contracts and tenders, businesses that make the move early, or already track their emissions and carbon footprint are at a competitive advantage versus those that don’t, or are slow in doing so.
In a way, as ESG regulations continue to expand and sustainability reporting becomes more pervasive, a company that tracks and reports on its emissions is future-proofing itself to continue to conduct business with others.
Forward-thinking non-listed companies are looking ahead and seeing future changes driven by consumer sentiment and new government legislation coming down the pipeline.
They’re maneuvering themselves today, to be in a better position to be able to survive, and thrive, in a more sustainability-focused business environment tomorrow.
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