As part of global efforts to address climate change, many countries have mandated climate disclosure requirements for public companies. But, several regulations extend beyond public markets to include privately held businesses, which has far-reaching impact.
While disclosure laws vary from country to country, the inclusion of scope 3 greenhouse gas emissions in many climate disclosure mandates already has significant and material impacts. It means smaller suppliers, vendors, and partners not directly mandated by new rules still find themselves compelled to understand and report their climate impacts and climate-related risks to large customers that are mandated to report. Still, size requirement thresholds for businesses to disclose have dropped dramatically. For example, the EU’s CSRD impacts companies as small as 250 employees with just €20 million in assets. That means even smaller businesses with local operations must disclose sustainability-related information.
The inclusion of scope 3 GHG emissions in many of these mandates, as well as the newly released ISSB international standards for ESG disclosure, mean that smaller suppliers, vendors, and partners not directly mandated by the rules find themselves compelled to understand and report their climate impact to their customers who are often big retailers.
Let’s dive in and understand how climate disclosure regulations already affect small and medium-sized businesses and what the future holds.
Related: The impact of Amazon’s supply chain sustainability push
Even companies that have not considered climate a material risk to their business should soon expect requests for climate data and other ESG metrics from large companies with ambitious ESG targets.
Regulation has accelerated this supply chain network effect, shifting expectations for SMEs to develop a more mature sustainability literacy, particularly around carbon accounting. Corporate climate disclosures are increasing in popularity across the global economy. The US, EU, UK, Canada, Hong Kong, and many other countries and regions have proposed or already enacted legislation that will make large and listed companies (and, in the case of the EU, even non-listed SMEs) to measure and report their climate information.
SEC’s climate disclosure rule and scope 3 emissions
In March 2022, the US Securities and Exchange Commission (SEC) released its proposed rule of a climate disclosure regulation in response to investor demand for standardized climate risk information. The proposal includes expectations for listed companies to disclose their physical and transition climate risks, scope 1 and scope 2 emissions, and scope 3 emissions if material or if the company has an existing emissions reduction target that includes scope 3. All told, the SEC’s rule will apply to approximately 4,000 publicly listed companies in the US.
The mandated disclosure of scope 3 emissions (indirect emissions throughout the value chain), which account for 75% of companies’ emissions on average, will create a network effect in which smaller companies are expected to measure and disclose their emissions allocated to their large buyers rather than be compelled directly by the regulation.
The long-awaited rule has been delayed multiple times due to expected lawsuits for issues surrounding the disclosure of scope 3 emissions. Should the law ultimately limit mandated requirements for scope 3, existing market pressure has already pushed forward scope 3 disclosures without legal requirements.
The EU’s regulatory landscape
The EU’s Corporate Sustainability Reporting Directive (CSRD) will affect many more companies than the SEC’s regulations, including some in other jurisdictions (more than 50,000 EU companies and 10,000 non-EU companies). CSRD will apply to the 11,600 companies already covered by the prior Non-Financial Reporting Directive (NFRD) as well as all companies, public and private, that meet at least two of the following criteria:
– 250 or more employees
– €20 million or more in total assets, or
– €40 million or more in turnover
It’s important to note that these criteria apply both to companies listed within the EU and elsewhere with subsidiaries operating within the EU.
The CSRD requires a much broader set of sustainability disclosures, including scope 3 and supply chain data. Large companies are expected to phase in disclosure of scope 3 in 2024, followed by SMEs with under 250 employees and foreign companies in 2028. It‘s expected that SMEs that comprise the supply chains of larger companies will share their allocation of emissions with larger companies as soon as 2024, ahead of being directly affected in 2028.
In June 2023, the EU Parliament passed another ambitious legislative measure that will affect SMEs in the supply chains of larger companies. The Corporate Sustainability Due Diligence Directive (CSDDD) will affect 4,000 non-EU and 12,800 EU companies. The CSDDD focuses on ensuring companies do their due diligence across their supply chains, holding companies liable for human rights and environmental issues. However, companies are not expected to comply with the CSDDD until 2030.
Global regulations forming around the ISSB
With so many countries developing different requirements for climate and emissions disclosures, most governments, including those in the G20, are now proposing to merge their disclosure mandates around the ISSB. The ISSB aims to be a global framework of interoperable and comparable standards across jurisdictions to provide a global baseline and harmonize reporting efforts across regions.
While each country will determine whether and how to legislate disclosure aligned with the ISSB’s sustainability (S1) and climate (S2) standards, the inclusion of scope 3 emissions sets the tone for SME’s in the value chain.
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The network effect
Apart from the above-mentioned CSRD, ISSB, and SEC rule, other network effect drivers that affect SMBs are at play. Investor- and customer-driven CDP requests have always been a driving market force.
41% of companies that report their emissions through the CDP (which will be incorporated into the ISSB) already engage with their suppliers to measure their scope 3 emissions, and that number is likely to climb as compliance kicks in.
The addition of scope 3 in climate disclosure mandates has caused a trickle-down of large companies asking smaller companies in their value chain to share their emissions data. Small- to medium-sized companies are already receiving requests from their large buyers to measure and report their emissions.
Related: Talking supply chain sustainability with humangear
The Biden administration recently announced one such ripple effect across its supply chain. It requires several thousand “major” (companies receiving more than $50 million in annual contracts) and “significant” (companies receiving more than $7.5 million in annual contracts) suppliers to the federal government to provide climate disclosures, including scope 3 in the case of major suppliers.
Many companies see the value in assessing their supply chain emissions, regardless of whether or not the SEC’s mandate will include scope 3. Whether they do it to meet ambitious in-house emissions goals or to mitigate climate risk across their supply chains, companies are increasingly asking suppliers for climate information for non-compliance reasons.
Some examples of companies with ambitious voluntary targets for scope 3:
- Philips aims for at least 50% of their suppliers to have a science-based emissions reduction target and is working with suppliers to help them make them.
- Through its Project Gigaton, Walmart aims to engage with suppliers to reduce or avoid one billion metric tons (a gigaton) of greenhouse gasses from the global value chain by 2030.
The trickle-down effect of these larger companies creates ambitious net-zero targets that affect smaller companies and how they do business:
- Companies that disclose emissions and set reduction targets to satisfy the requests of their influential buyers often find value in participating. In the case of Project Gigaton, Walmart created a scoring system for its 5315 suppliers program and has given 1576 of their suppliers gold “giga-guru” recognition. The award is given to companies like AR Produce & Trucking Corp, which sets specific, measurable, achievable, relevant, and time-bound emissions goals and tracks progress toward those goals. AR Produce & Trucking Corp. may now use this accolade to build its reputation and appeal to new customers seeking companies with existing emission reduction strategies.
- Small and medium-sized companies also find value in joining associations to help navigate incoming emissions data requests. The UN’s SME Climate Hub offers companies tools, resources, and a community to make and reach emissions targets. The CDP, in collaboration with the SME Climate Hub, created a framework to help SMEs track and report progress toward their climate commitments. Companies with ambitious goals, like Philips, use groups like The Responsible Business Alliance to collaborate with their suppliers to assist in their climate disclosure journey.
As company climate targets cascade down their supply chains, more and more small businesses feel pressure to start their climate journey. Thankfully, they can ease into the process starting with simple data gathering and emissions factors calculations—with tools like Sustain.Life—and evolve as their processes mature.
What you can do: Why start calculating your carbon emissions now?
Most climate disclosure regulation is based on the reporting designed by the Greenhouse Gas Protocol (GHGP), which is the standard governing how organizations should calculate their carbon emissions. It prescribes methodologies and approaches to calculate emissions. It provides a hierarchy of acceptable methods from most precise—primary activity data—to less precise, like spend data as a proxy—but is not prescriptive as to which emissions factor data sets get used. Let’s take the example of a company that wants to calculate the emissions from vehicles it owns (mobile sources). Calculating emissions based on total fuel consumed is most accurate because that’s the highest quality and most specific source data—although it's the hardest to collect. This is called the fuel-based method. Next is the distance-based method, which is based on mileage traveled and assumes you have some basic MPG info for the vehicle. The last in the hierarchy is based on spend, a proxy for the first method. It’s the least precise since fuel prices are volatile, and the emissions outputs are more closely tied to those price fluctuations than any actual reduction in driving or emissions.
GHGP guidelines are expected to become more rigorous and prescriptive now that so many jurisdictions are formalizing and legislating emissions disclosure. With tools like Sustain.Life, businesses will be positioned to understand and disclose their emissions as needs arise. Early carbon accounting and reporting adopters will be more competitive in the marketplace as larger companies look for suppliers ready to share climate data. They will also reduce their own climate risks as markets change, climate regulations are adopted, and the physical effects of climate change become more pronounced.
Sources
1. The Securities and Exchange Commission, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” https://www.sec.gov/files/rules/proposed/2022/33-11042.pdf Accessed August 28, 2023
2. CDP, “CDP Technical Note: Relevance of Scope 3 Categories by Sector,” https://cdn.cdp.net/cdp-production/cms/guidance_docs/pdfs/000/003/504/original/CDP-technical-note-scope-3-relevance-by-sector.pdf?1649687608 Accessed August 28, 2023
3. Bloomberg Law, “SEC Climate Rules Risk Legal Battle with Environmental Groups,” https://news.bloomberglaw.com/esg/sec-climate-rules-risk-legal-battle-with-environmental-groups Accessed August 28, 2023
4. World Resources Institute, “Trends Show Companies Are Ready for Scope 3 Reporting with US Climate Disclosure Rule,” https://www.wri.org/update/trends-show-companies-are-ready-scope-3-reporting-us-climate-disclosure-rule Accessed August 28, 2023
5.) The Wall Street Journal, “At Least 10,000 Foreign Companies to Be Hit by EU Sustainability Rules,” https://www.wsj.com/articles/at-least-10-000-foreign-companies-to-be-hit-by-eu-sustainability-rules-307a1406 Accessed August 28, 2023
6. Elevate, “EU Parliament approves supply chain due diligence directive, kicking off a wake-up call for companies,” https://www.elevatelimited.com/blog/eu-parliament-approves-supply-chain-due-diligence/ Accessed August 28, 2023
7. IPE, “G20 finance leaders and central bankers back ISSB progress on new reporting standards,” https://www.ipe.com/news/g20-finance-leaders-and-central-bankers-back-issb-progress-on-new-reporting-standards/10065425.article Accessed August 28, 2023
8. CDP, “Companies failing to engage suppliers on nature and climate despite incoming regulation,” https://www.cdp.net/en/articles/media/companies-failing-to-engage-suppliers-on-nature-and-climate-despite-incoming-regulation Accessed August 28, 2023
9. Wilmer Hale, “Biden Administration Proposes Climate Disclosure Rules for Federal Contractors,” https://www.wilmerhale.com/en/insights/blogs/ESG-Epicenter/20221208-biden-administration-proposes-climate-disclosure-rules-for-federal-contractors Accessed August 28, 2023
10. The Wall Street Journal, “SEC’s Climate-Disclosure Rule Isn’t Here, but It May as Well Be, Many Businesses Say,” https://www.wsj.com/articles/secs-climate-disclosure-rule-isnt-here-but-it-may-as-well-be-many-businesses-say-854789bd Accessed August 28, 2023
11. Philips, “Greening the Supply Chain,” https://www.philips.com/a-w/about/environmental-social-governance/environmental/supplier-sustainability/greening-the-supply-chain.html Accessed August 28, 2023
12. Walmart Sustainability Hub, “Project Gigaton,” https://www.walmartsustainabilityhub.com/project-gigaton Accessed August 28, 2023
13. CDP, “SMEs equipped to join race to net-zero with dedicated climate disclosure framework,” https://www.cdp.net/en/articles/companies/smes-equipped-to-join-race-to-net-zero-with-dedicated-climate-disclosure-framework Accessed August 28, 2023
14. The Greenhouse Gas Protocol, “A Corporate Accounting and Reporting Standard,” https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf Accessed August 28, 2023
