Forthcoming Rules Will Necessitate Climate Reporting and Supplier Visibility Across the Supply Chain

By Sharon Lo, Managing Editor, DTJ & The Source

The importance of environmental, social, and governance (ESG) reporting has increased rapidly in recent years as public expectations shift and these performance measures influence investors’ decisionmaking. According to McKinsey, as of 2019, global sustainable investment topped $30 trillion. This amount constituted a 68% increase since 2014 and a tenfold increase since 2004.1

But, despite increases in interest and investments in ESG, measurement and reporting standards are inconsistent. To that end, this past May the Securities and Exchange Commission (SEC) released proposed amendments to rules and reporting forms that aimed to “promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors.”

In short, the SEC will require publicly traded companies to report their total emissions and standardize the metrics by which the reporting is done. But, as we have seen time and time again over the last few years, the interconnected nature of supply chains means that these changes will be felt by companies large and small, across the supply chain, publicly traded or not.

There are three categories of emissions—Scope 1, 2, and 3. Scope 1 are the Green House Gas (GHG) emissions a company makes directly, such

What is ESG?

Environmental: includes issues focused on climate risks, carbon emissions, energy efficiency, use of natural resources, pollution and biodiversity

Social: includes issues focused on human capital, labor regulations, diversity, DEI, safety, human rights and community involvement

Governance: includes issues focused on board diversity, corruption and bribery, business ethics, compensation policies and general risk tolerance 3 use them. For many businesses, Scope 3 can account for more than 70% of their carbon footprint.2 as emissions that occur from running boilers at company-owned facilities or fuel used by company-owned vehicles.

Scope 1 and 2 emissions, by and large, can be controlled, tracked, and reported by the company itself. To report Scope 3 emissions companies will have to report on emissions data on the operations and supply chains of their suppliers. This is a daunting task—especially if the company faces penalties or liability for reporting on something so widely out of its control.

Scope 2 covers emissions a company makes indirectly, so emissions that are generated when a company purchases electricity, steam, heat, or cooling from a utility company.

Scope 3 emissions include all emissions associated, not with the company itself, but that the organization is indirectly responsible for, up and down its value chain. This includes tasks such as buying products from suppliers and from products when customers

Originally these rules were set to take effect as early as March of 2023. Currently, the SEC is still reviewing public comments and the rules will likely not go into effect until April or perhaps even later. In the interim, companies large and small, publicly traded or not should prepare. And not just for this particular change. This is just one of many instances where sustainability and supplier visibility are shifting from trends to imperatives for those in industry. DTJ

1 McKinsey & Company. (2023, January 30). What is ESG? Retrieved from McKinsey. com: www.mckinsey.com/featured-insights/ mckinsey-explainers/what-is-esg

2 Deloitte. (2023, January 30). Scope 1, 2 and 3 emissions What you need to know. Retrieved from deloitte.com: https:// www2.deloitte.com/uk/en/focus/climatechange/zero-in-on-scope-1-2-and-3emissions.html

3 Ernst & Young. (2023, January 30). ESG Reporting. Retrieved from ey.com: www.ey.com/en_us/esg-reporting