How To Navigate Climate Disclosure Regulation

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C-Suites will soon be responsible for integrating modern sustainability strategies within their organizations’ financial reporting—and boards will be responsible for oversight—but many don’t know where to start or how to track emissions.

As the effects of climate change become increasingly apparent, sustainability has moved front and center for CEOs worldwide who are under pressure to reduce their organizational environmental impact. As the world prepares to achieve net zero by 2050, governments are cracking down on enterprises to track their carbon emissions throughout the supply chain.

The new Climate Disclosure rule proposed by the SEC will require public companies to significantly increase their reporting on climate risk to investors, specifically on Scope 1 and Scope 2 emissions, which are emissions generated by a company’s own operations. Perhaps most importantly, the rule will also require Scope 3 disclosures, which are upstream and downstream emissions along a company’s entire value chain.

This groundbreaking legislation will likely reveal that numerous companies face higher exposure to carbon emissions than what many investors had anticipated. Additionally, the results of these mandates may fundamentally alter how the U.S. addresses the impacts of a warming planet. Although this regulation only applies to public companies, private companies of all sizes will feel pressure from stakeholders, boards, customers, and employees to increase transparency for ESG-related initiatives. C-suites will be responsible for integrating modern sustainability strategies within their organizations’ financial reporting, but many don’t know where to start or how to track their emissions.

A Blind Spot: Scope 3 Emissions

According to McKinsey, Scope 3 emissions make up 80-90% of the greenhouse gas emissions associated with most products and constitute approximately 75% of total emissions for companies across various industries. Unfortunately, capturing and monitoring Scope 3 carbon emissions poses significant challenges. Measuring and managing these emissions is exceptionally complex because it requires tracking a wide array of activities and emissions from every actor involved in a product’s life cycle, from its inception to its disposal. Currently, reporting on Scope 3 emissions relies heavily on estimates or on supply chain partners for accurate emission measurements.

Furthermore, the technical guidance for Scope 3 emissions is still in the early stages of development, and there is a need for legally binding methodologies, as many companies have primarily focused on addressing Scopes 1 and 2. In theory, a company could achieve net-zero emission goals much quicker by addressing only Scope 1 and Scope 2 emissions. However, this may change if the proposed SEC regulations are enacted.

As regulations that heighten scrutiny on emissions reporting come into force, companies are confronted with a significant obstacle. While increasing efforts to reduce their environmental impact is one challenge, implementing supply chain traceability solutions to track Scope 3 emissions presents an entirely different set of complexities.

Tracing Your Steps

In the face of this new SEC rule, it will be critical for business leaders to readily have access to data on incoming materials, their movement, storage, manufacturing processes, personnel assignments, and more. The integration of smart manufacturing technologies will play a pivotal role in reducing Scope 3 emissions. Industry 4.0 solutions have the capability to capture, interpret, and analyze data pertaining to energy consumption, carbon emissions, and waste, equipping C-suites with valuable insights to pinpoint opportunities for minimizing the company’s environmental footprint.

By thoroughly examining energy consumption data, organizations can pinpoint energy-intensive processes and take measures to enhance their efficiency. Likewise, by scrutinizing waste data, they can pinpoint the origins of waste and implement strategies to curtail them. As a result, smart manufacturing technologies will make it easier for businesses to comply with reporting requirements for decarbonization, energy usage, and waste management. These solutions will empower C-suites to monitor their progress toward sustainability objectives and demonstrate transparency to investors and stakeholders, therefore improving brand affinity.

Actionable Next Steps

There are a few actionable steps C-suites can take now to enhance their sustainability efforts. First, business leaders should educate themselves and follow recommendations from the Department of Energy’s “Industrial Decarbonation Roadmap” released in conjunction with the SEC’s Climate Disclosure regulation. This comprehensive strategy outlines four key pillars for industrial decarbonization: energy efficiency; industrial electrification; low-carbon fuels, feedstocks, and energy sources (LCFFES); and carbon capture, utilization, and storage (CCUS).

Next, consider deploying smart technologies, such as energy-efficient motors and lighting. This will help significantly reduce energy consumption throughout the supply chain. Artificial Intelligence and Machine Learning can also help analyze energy usage over time in correlation with production processes to yield further savings. Furthermore, data analytics offer valuable insights into energy consumption, waste reduction, and carbon emissions. Scrutinizing this data can help reveal previously hidden blind spots and identify areas of improvement.

By following these steps, CEOs can diminish their environmental impact, meet reporting requirements, and build trust with investors. Sustainability requirements are only getting more stringent, so it would be wise for organizations to practice transparency when it comes to their environmental footprint. Those who fail to recognize the benefits of utilizing smart manufacturing technologies in tracing carbon emissions will get left behind.

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