5 things employers need to know about reporting their Scope 3 carbon emissions
Compliance can be scary, especially when there is a half-million-dollar fine hanging above your head.
That’s the case for employers in California who have to comply with new regulations that require Scope 3 carbon emissions reporting by 2027. And it’s more far-reaching than just California. That legislation includes calculating emissions for other offices that California-based companies own, across the U.S.
And alongside California’s new legislation, there are other standards that employers need to be cognizant of, including the GHG Protocol Corporate Accounting and Reporting Standard. With so much to stay on top of, there is a lot that employers need to understand and tackle with a multi-pronged approach. We spoke with experts to better understand how employers should prepare for new reporting mandates, including Scope 3 carbon emissions. Here are the five things they said employers should be doing right now.
1. Understand the differences between carbon emissions, upcoming regulations and how it will impact your business
Scope 1 carbon emissions include company-owned vehicles and fuel combustion, while scope 2 focuses on electricity, heat and A.C. consumption.
“Scope 3 carbon emissions covers everything else,” said Philippe Pernstich, founding footprint lead at Minimum, a digital emissions tracking platform that helps enterprises with complex carbon footprints decarbonize at scale.
There are 15 categories of Scope 3 emissions, which includes everything from office furniture and purchased goods to business travel and waste disposal. David Linich, decarbonization and sustainable operations consulting partner at PwC, describes them as “very complex.” Across industry sectors, Scope 3 emissions are 11 times the size of Scope 1 and 2. It’s the largest bucket that includes all of your supply chain.
Besides understanding the differences between carbon emissions, employers need to have someone who is really familiar with what regulations they need to follow. In recent years, the Securities and Exchange Commission (SEC) Climate Disclosures began requiring companies to include specific climate-related disclosures in their registration statements and reports.
“Information on climate-related risks that are likely to impact a business’s operations or financial conditions must now be formally documented in an audited financial statement,” said Nari Viswanathan, senior director of supply chain strategy at AI-driven business spend management platform Coupa.
In California, that task is a little larger. California is the only U.S. state to enact a first-of-its-kind mandatory climate emissions disclosure rule. It means that companies operating in the state need to report what emissions they rack up in the running of their operations. And if they fail to comply once the law is enforced in 2027, they face penalties of up to $500,000.
Two laws were signed into law by Governor Gavin Newsom in October 2023: The Climate Corporation Data Accountability Act (SB 253) and SB 261, which requires disclosure of climate-related financial risks. It’s monumental and sets a precedent for future legislation in other states. California is the world’s fifth-largest economy by GDP and home to corporate giants such as Apple, Google and Microsoft. Additionally, it will impact other offices across the country as long as their headquarters are in California. The law applies to public and private companies that exceed $1 billion in annual revenue.
Additionally, the European Union Corporate Sustainability Reporting Directive (CSRD) that went into effect in January 2023 also requires companies to report on the impact of their activities on the environment. Similar to the California regulation, if you do any business in the EU, the regulation applies to you.
And even if there aren’t regulations directly tied to your state, there is more pressure to report publicly as a sustainability initiative.
2. Use available resources to get your finger on the pulse
A first step that an employer might take in better understanding their carbon emissions is using the social cost of carbon (SCC), a calculation that estimates the economic damage caused by one extra ton of carbon emissions being emitted into the atmosphere. It also estimates the benefit of reducing a ton of carbon emissions. The SCC, used to help policymakers and other legislators decide if a policy to reduce climate change is justified, informs billions of dollars of policy and investment decisions. There are multiple resources available to help you calculate this on your own.
Pernstich said that a lot of employers can figure out their greenhouse gas emissions on their own with tools like this one, where they then put it in a spreadsheet to track it a little closer. However, that can only go so far and doesn’t really account for how to adjust to hit certain goals.
“It depends on how much an employer wants to approach this,” said Pernstich. “In terms of whether or not to use a third-party, it depends what the end goal is and how much value they want out of the data itself.”
That’s where consultancies come in.
3. Identify consultants to work with to help with compliance
The two different documents that help calculate carbon emissions are 334 pages long of densely packed, technical information. “Most companies are not trying to figure this out on their own,” said Linich. “They’re relying on experts.”
There are hundreds of consultants, like Minimum, that employers can use to make their lives a bit easier. Minimum unpacks employers’ supply chains using real-time data flows to gather oversight on carbon emissions and management. The company partnered with stock exchange Nasdaq last year to do just that.
“Having a software solution makes life a lot simpler,” said Pernstich. “It enables the clients to engage more directly with the data and gain valuable insights. They can understand the hotspots for where their carbon emissions are concentrated and be able to tackle that in particular with their targets over time.”
But they aren’t the only ones doing this kind of work. There’s also PwC, CBRE, Sustain.Life, Greenly Earth, and many more that help with decarbonization consulting. Choosing the right one is important. Alyssa Rade, chief sustainability officer at Sustain.Life, says there are key questions to ask potential partners: What emissions factors were used? What resources or references did they cite? What global warming potentials are used?
“It’s critical that you select one that is giving you transparency and visibility into how the carbon emissions are being calculated,” said Rade. “While you might not understand it all or be a master of it all on day one, make sure to choose a provider that gives you the tools, resources and visibility to be able to take that journey.”
4. Figure out who your point of contact will be
Whether you are doing this work in-house or with a third-party vendor, a company needs a point person (or team) who can ensure a company will be complying with regulations, hitting their own internal goals, and conducting calls with outside vendors if that’s the route they choose. In some cases, that person might be someone from finance if the company is on the smaller side, and in other cases, an entire ESG team might already be underway.
When possible, the latter is more helpful to ensure that there is a well-thought-out approach to a company’s sustainability efforts. If a company is especially large, it’s extremely important to make sure that all departments are on top of calculating their carbon emissions.
Linich says that today, with sustainability teams being so under-resourced, most CFOs are actually stepping up to the plate.
“I’m seeing the center of gravity around this shift more to the CFO where companies are realizing the data that we’re putting out externally around our sustainability performance is going to be subject to assurance,” said Linich. “The CFO within an organization has that competency to make sure it is the more accurate and robust data.”
Rade says that the points of contact who they work with are really a mixed bag, indicative of where companies are in their reporting process. “There are a lot of deer in the headlights buyers right now,” said Rade. “They’re being required to do this legally for the first time and it’s becoming this critical business need.”
5. Invest in additional sustainable practices
Once a company can understand the scale of its greenhouse gas emissions, it needs to plan how it can reduce its overall carbon footprint. This might be a bigger lift for a company that is struggling to hit certain compliance targets.
“Most businesses suffer from major data blindspots, making it impossible for them to make meaningful progress on sustainability objectives,” said Viswanathan. Even before the carbon emissions calculations process, he suggests leveraging AI to flag risky suppliers before contracting with them. For example, you can ask questions like: Does a supplier have a history of emitting significant CO2 emissions? Do they submit invoices on time? Do they abide by ethical hiring practices and fair treatment of their workers?
And asking those questions can reveal possible business opportunities, said Linich. For example, he worked with a global hotel chain to come up with a better version of a lighter towel that would be easier to launder and wouldn’t use as much energy. It kicked off an innovation exercise, which resulted in a new towel that dried faster and was a commercial success.
“When you are understanding what your sources of emissions are upstream and downstream in your value chain, you can end up seeing hotspots of opportunity and where the biggest buckets of emissions are located,” said Linich. “As you start to shine a light on those hotspots of emissions and address them, you tend to drive down costs, and in some cases, you end up spurring innovation with your value chain partners through collaboration.”