“The only thing you know for sure about your model is that it's wrong.” This was the first piece of wisdom my mentor shared with me back when I started as an equity analyst. It is broadly applicable to almost any form of forecasting or estimation, including Scope 3 emissions. But does that mean that it's not useful?
In this blog
The Corporate Sustainability Reporting Directive (CSRD), published in the Official Journal of The European Council (EC) on the 16th of December 2022, is one of the most ambitious pieces of legislation in terms of scope and implementation timelines. EFRAG delivered the first set of draft European Sustainability Reporting Standards (ESRS) to the European Commission on the 22nd of November, 2022. During the vote, members of the EFRAG Sustainability Reporting Board were at pains to repeatedly highlight that the draft standards were by no means perfect despite their ultimate approval. This underlines the immense time pressure the EFRAG Project Task Force was under to deliver the standards on schedule for the proposed CSRD implementation timelines. The final standards are expected to be adopted as delegated acts in June 2023, ahead of the first reporting year per the CSRD (for listed companies with over 500 employees) in 2024.
This marks a rapid acceleration in progress versus what was previously seen in the ESG reporting landscape. Findings released by the Intergovernmental Panel on Climate Change (IPCC) have made it clear why countries need to act now to reduce emissions, and consistent, reliable disclosure can help policymakers chart a path to reach their goals. The progress in the EU has also accelerated the pace of other standard setters internationally; for example, the ISSB is aiming for its first two standards to be finalised in early 2023.
Why the rush?
The reasoning behind the acceleration is sound: the sooner the regulation comes into effect, the sooner there is a baseline to compare against. And we, as humans, love a benchmark. After all, you’ll rarely find someone who starts a diet without checking the scale first.
“Knowing where in supply chains emissions are, in which countries and locations, is critical in building your company’s climate resilience plan.”
Emmanuel Faber, ISSB chair, in an Economist Impact article published 20 December 2022.
As an individual business, it’s tempting to wait and see - reporting timelines may be pushed out, along with introducing new carbon taxes. However, meaningful change requires time to implement and, most importantly, knowing where to start. This is particularly the case for Scope 3 emissions. All departments need to be aligned on the strategic direction and work together if they are to have an impact across the value chain.
THE ABCs and 1, 2, 3s of GHG
When collecting and reporting on sustainability data, companies urgently need to look at the Greenhouse Gas Protocol and its emission scopes. In sustainability reporting, Scope 3 reporting is soon becoming mandatory for a whole lot of companies, so if you don't have a process, you have to start now. What are the ABCs and 1, 2, and 3s of GHG?
So where to begin?
Effective targeting of improvement programs begins with knowing where you are and what are your pain points. Some of the key steps in the process are outlined below:
- Use broad estimates to get a sense of total Scope 3 emissions
- Identify hotspots (easy wins and sources of significant emissions) and develop targeted improvement programs
- Establish links between departments for cross-functional collaboration
- Engage with tier 1 suppliers on hotspots, including supplier education into what data is needed, how they can benefit and possibly offer assistance with implementation
- Refine estimates using actual supplier data to get to more realistic, product-specific emissions estimates
- Set up emissions reduction programs in partnership with suppliers in the value chain, deciding where to allocate funding etc. This should incorporate both easy, short-term wins and putting the building blocks in place for longer-term structural changes
- Evaluate actual performance against expectations
- Repeat the process with the next grouping of suppliers/products, incorporating the lessons learnt
When you plot these steps onto timelines, the reason to start now becomes abundantly clear: The more time you have to implement, the less business disruption there needs to be, and the more likely you will benefit over the longer term.
The change is painful, but it is also inevitable, and it can present opportunities. For example:
- Destabilisation of the status quo: potential to gain significant market share in industries that were previously considered to be mature
- Employee satisfaction: Breathing new life into existing roles through new ways of working and approaching problems
- A resilient business: Strengthening of supplier relationships and a deeper understanding of the risks and opportunities in one’s value chain
How can structured data help you?
Whilst initial emissions estimates are likely to be high-level calculations based on industry averages, these will need to be refined over time. The most valuable insights, particularly when analysing the success of emission reduction programs, will require more accurate, company-specific data. As estimates become more detailed and data sources increase (from one or two secondary databases to hundreds or even thousands of value chain partners), data traceability and quality measurement become vital. Carbon software tools selected need to be able to meet your needs at each stage of this journey.
Using taxonomies to create portals that validate and structure incoming data from value chain partners is a useful way to standardise this information, thus ensuring consistency for aggregation purposes. However, software and automation are required not only for data aggregation and calculation of total emissions; it is equally important for drilling down and analysing from multiple perspectives. In this way, improvement programs can be optimised to reduce emissions and improve the quality of the estimates themselves.
In time, emissions estimates will be subject to assurance engagements. Structured data can reduce audit time and complexity by providing end-to-end traceability and making it easier to confirm the relevance, reliability and accuracy of the data used. It’s never going to be perfect; it’s all about that benchmark and being able to measure your progress. Early adopters who have successfully implemented purpose-specific software solutions will have a head start, and more confidence in what they are reporting when the time comes to have their data assured.
Look out for our next blog on The Scope 3 Data Quality Dilemma: forging a path to measuring, tracking & improving emissions estimation accuracy over time.