The Accelerating ESG Disclosure Landscape

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Greenhouse gas (GHG) emission disclosure is rapidly becoming a necessary first step for organizations that want to reduce emissions while staying viable and profitable. The demand for GHG disclosure has become ubiquitous and is coming from every angle. Investors increasingly want to understand what risks climate change poses to individual organizations within their portfolios, while clients and consumers are also becoming more interested in knowing the upstream and downstream GHG emissions associated with the products and services they buy. It has been shown that consumers are even willing to pay more for sustainable products and services. The Securities and Exchange Commission (SEC) proposed a new law that is expected to standardize climate disclosures by requiring companies to begin disclosing GHG emissions and other climate change-related metrics. The mounting pressure from investors, clients, and consumers is bringing GHG emission disclosure to the forefront of what best-in-class organizations are doing to stay profitable, meet the demands of their stakeholders, and prepare for a potential government-mandated law.

What does GHG disclosure include?

GHG disclosure covers an entire organization's Scope 1, 2, and 3 GHG emissions:

  • Scope 1 emissions are direct emissions (e.g., fleet vehicle emissions, emissions from building operations).

  • Scope 2 emissions are indirect emissions from purchased electricity and other forms of energy.

  • Scope 3 emissions are all other indirect emissions not included in Scope 2 emissions.

Overview of GHG Protocol scopes and emissions across the value chain (source: GHGprotocol.org)

Which GHG disclosure system is best?

Companies that are striving to become more sustainable can choose between multiple disclosure systems that exist to help organizations manage their GHG emissions and environmental impacts. One such system, CDP, is considered the gold standard or best-in-class approach with 64% of the global market capitalization reporting through its guidance in 2021.

To achieve the highest possible CDP score, or to land on the coveted CDP “A-list”, organizations must disclose at least 70% of their Scope 1 and 2 GHG emissions, and at least one Scope 3 category. Companies need to only disclose the one most material Scope 3 emissions category out of a possible fifteen categories to be considered for an A-grade from CDP. CDP’s Scope 3 emission disclosure requirements were updated in early 2022 to help provide clarity as Scope 3 tracking is significantly more complicated than Scope 1 or Scope 2 and has been identified as increasingly more important for making an impact on reducing GHG emissions for many sectors. CDP scores organizations on an A to D grading scale, with scores over a C requiring organizations to move beyond disclosure and into actual management action.

CDP and other reporting organizations will continue to increase disclosure requirements to align with the latest science from the Intergovernmental Panel on Climate Change (IPCC). More rigorous GHG accounting requirements will only widen the competitive advantage between companies that currently disclose GHG emissions and those that do not. However, disclosure is only the first step toward a comprehensive ESG strategy and a sustainable business. CDP recognizes the need to move beyond disclosure through its scoring methodology.

Setting Science-Based Emission Reduction Targets

GHG emissions reduction through climate action planning is a crucial step that CDP promotes through its reporting. Setting Science-Based Targets (SBTs) is an industry best practice for climate action planning. GHG emission transparency allows investors, clients, consumers, and governments to assess climate-based risk, and setting Science-Based Targets demonstrates a commitment to minimizing those climate-based risks. Climate action planning is also intrinsically time-sensitive. The IPCC is clear; global GHG emissions must peak by 2025 and be reduced by 43% by 2030, leaving companies with only 7.5 years to accomplish their Science-Based Targets.

Reporting on Waste Generation

GHG emission accounting and reduction can be a daunting task, but still, there is more to consider when holistically addressing organizational environmental impacts. Waste generation and biodiversity impact are the next areas companies will be asked to report on.

GHG emissions from landfill waste are already captured in Scope 3 emission inventories. However, waste production has additional significant negative environmental impacts and organizations will soon be asked to account for operational waste production. Some reporting agencies, like the Global Reporting Initiative (GRI), already ask for waste generation metrics and can serve as a preview to potential requests from CDP. Companies should be prepared to track the total weight of waste generated per waste stream to properly disclose. Waste diversion through circularity measures will likely represent a leadership position and will become more and more important as organizations strive to become sustainability leaders.

What is waste circularity?

Waste circularity refers to the process in which waste is handled. Waste can be reframed as a valuable resource when viewed through a circularity lens. For example, organic waste can be redirected through a compost stream rather than a landfill stream. When organic waste is composted, it decomposes in an aerobic environment reducing both Scope 3 emissions and total waste production. Additionally, composted organic waste is transformed into valuable soil in less than a year, completing the circularity cycle. By viewing waste as a resource rather than a burden, companies can reduce their climate-related risks and manage their GHG emissions with more control. Several circularity certification and reporting systems exist including Cradle to Cradle Certified, Circulytics, and Circular Transition Indicators from the World Business Council for Sustainable Development (WBCSD).

Biodiversity and Nature-Related Disclosure

In addition to waste generation, organizations will be increasingly called upon to report on their biodiversity impact. CDP currently includes one question on biodiversity; this is likely to increase by 2025. Like the Task Force on Climate-related Financial Disclosures (TCFD), the Task Force on Nature-related Financial Disclosures (TNFD) has been in the works since 2020. In March 2022, the TNFD released the first beta version of its risk management and opportunity disclosure framework. CDP closely aligns with the TCFD, and future CDP questionnaires will likely align with the TNFD. It is safe to say that these reporting protocols will most likely be the standards used by the SEC and/or other government entities mandating laws requiring organizations to disclose their GHG emissions.   

Unlike climate change, a nature-related disclosure will be location-specific. GHG emissions generally impact climate change equally regardless of location. Ecosystem degradation is highly place-dependent because different biomes and ecosystems respond differently to various systematic alterations. Companies with global or multi-regional footprints will require significantly more accounting than most small and mid-sized enterprises operating in localized spaces.

The TNFD Nature Risk Assessment Approach: LEAP

Organizations should prepare to work with the TNFD methodology LEAP (Locate, Evaluate, Assess, and Prepare) to help disclose on their biodiversity impact.

LEAP is an acronym for Locate, Evaluate, Assess, and Prepare:

  • The Locate section requires organizations to catalog how their business footprint interfaces with nature.

  • The Evaluate section calls for organizations to consider how their operations both depend on nature and impact nature.

  • The Assess section asks organizations to take the impacts determined in the Evaluate section and identify how those impacts might translate into risks for the organization. Over half of the world's economic output is either moderately or highly dependent on nature. Biodiversity loss poses an immense risk to organizations highly dependent on natural resources, and therefore Assess is an important part of LEAP.

  • The final stage in LEAP is the Prepare section which helps organizations respond and report on their nature-related risks. 

Biodiversity Framework Alignment

Additional organizations are currently working towards biodiversity and nature positive alignment. The United Nations Convention on Biological Diversity (CBD) is developing a Post-2020 Biodiversity Framework. The first draft was released in July 2021; the final framework will be set in October 2022 at COP 15. It is likely to set approximately 20 globally agreed-upon action targets for 2030. The Nature Positive Call to Action, signed by over 300 organizations, aligns with the CBD Post-2020 Biodiversity Framework. The Science-based Targets Network is also aiming to release SBTs for Nature in 2023. Measuring biodiversity and nature positivity is more complicated than GHG emissions, but organizations like the International Sustainability Standards Board (ISSB) will be moving toward standardizing nature positive metrics.

ESG Reporting: Stay Ahead of the Curve

The impacts of climate change and environmental degradation are already being felt around the world. By 2050, climate change will reduce global economic output by 10%. Organizations already, and will continue, to face real physical and transitional climate-related risks. Investors, clients, consumers, and governments recognize these facts and are calling on organizations to respond. The first step in responding is disclosing GHG emissions across Scopes 1, 2, and 3. Once GHG emissions are understood, climate action planning built on Science Base Targets (SBTs) will help reduce an organization’s exposure to climate-related risks. Due to the rapid deterioration of the natural environment, GHG action will soon not be enough and stakeholders will quickly require organizations to disclose waste and nature-related risks. Organizations will continue to be asked to disclose more and transition operations quicker, so staying abreast of ESG disclosure requirements will help organizations to prepare and stay ahead of the ESG reporting curve.

KERAMIDA can assist companies at any stage in the ESG journey. KERAMIDA has a team of experts who can help disclose GHG data through all reporting platforms, including CDP. As a CDP Gold Accredited Provider, KERAMIDA has worked with organizations to improve their CDP scores using our disclosure review and Roadmap to 'A' Strategy approach. KERAMIDA experts can also guide you through climate action planning with offerings ranging from Climate Scenario Analysis (CSA) to Science Based Target (SBT) setting. KERAMIDA also has multiple experts who can assist you as you prepare for future reporting and planning needs in waste diversion and biodiversity. For more information, please contact us or call (800) 508-8034 to speak with one of our Sustainability consultants today.

Author

Nick McCreary, MS, LEED AP
Vice President, Sustainability & Climate
KERAMIDA Inc.

Contact Nick at nmccreary@keramida.com