All hot air: why companies must now assess their greenhouse gas emissions

In the quarter century since the first adoption of the UN’s Kyoto Protocol, greenhouse gas emissions and the wider impact of human activity on the environment have become increasingly greater concerns for governments, businesses and the general public.  And as the real effects of climate change appear, the push for carbon neutrality has accelerated.

Recognising the need for an international standard for corporate greenhouse gas accounting and reporting in the late 1990s, the World Resources Institute (“WRI”) and the World Business Council for Sustainable Development (“WBCSD”) established the Greenhouse Gas Protocol (“GHG Protocol”). This created a comprehensive global standardised framework to measure and manage greenhouse gas emissions from private and public sector operations, value chains and mitigation actions.

Today, the GHG Protocol has been widely adopted as the standard for greenhouse gas accounting and the UK Government encourages companies and organisations to use the Protocol when measuring emissions.

Companies will face increased scrutiny from stakeholders to demonstrate that they understand where in the supply chain their emissions are coming from and that they are taking steps to reduce levels as part of a corporate climate change strategy.

Indeed, recent court rulings and shareholder votes against the interests of big oil companies such as Royal Dutch Shell and Exxon Mobil indicate this is picking up speed; in May, Royal Dutch Shell lost a climate lawsuit, the management team at Chevron suffered defeat by shareholders, who voted for setting an absolute reduction target for greenhouse gases. Meanwhile, Exxon Mobil saw shareholders override management to appoint climate-minded board members.

For corporates in all sectors, communicating how their greenhouse gas emissions are being measured and tackled is integral to engaging with a market that is increasingly cognizant of the role of capital in funding the energy transition and decarbonisation of the economy.

Scope emissions

When categorising greenhouse gas emissions, most major organisations and businesses use the three groups or ‘Scopes’ set by the GHG Protocol. Within this, Scope 1 covers direct emissions from owned or controlled sources such as fuel usage and company vehicles. Scope 2 covers emissions indirectly released via the generation of purchased electricity, heating and cooling used by a business; whilst  Scope 3 includes all other indirect emissions that occur within the supply chain operated by the company – including purchased goods, business travel, and investments.

Multinational organisations (particularly those in the public and listed spheres) or those with multi-tier complex value chains find obtaining these figures most challenging and given that reporting on Scope 3 is currently voluntary, many choose not to measure or disclose data on these emissions at all.

Even if voluntary, there are several benefits for organisations measuring and reporting Scope 3 emissions via the GHG Protocol. This includes, for example, assessing the extent to which climate change may affect their business and positioning themselves as industry leaders when it comes to climate change strategy. 

Completing regular emissions audits and demonstrating that a climate change strategy is in place also helps strengthen a business’ green credentials in an increasingly environmentally conscious marketplace. Companies seeking such data from suppliers on greenhouse gas emissions means there will also be an increased expectation for SMEs to measure and report on their emissions – making it easier in future for companies to conduct Scope 3 audits along the value chain.

Enter ESG

Last year marked a significant turning point for Environmental, Social and Governance (“ESG”) focused investing.  ESG focused funds performed better than their non-ESG counterparts even as the market reeled from the initial impact of the pandemic in Spring 2020.

As was noted in a recent insight piece on ESG and the mining sector, regulation around reporting on climate change has stepped up – for example, UK Chancellor Rishi Sunak announced last year that climate risk reporting will become mandatory for large companies and financial institutions in the UK, with the FCA to enforce Task Force on Climate-related Financial Disclosures (“TCFD”) guidelines for premium listed companies in 2021.

ESG-focused investment strategies are now mainstream and recent performances also indicate that investors (institutional and retail alike) can make serious gains without compromising values – a strategy which is firmly here to stay.

Leaders not followers

It is clear that businesses need to rise to the challenge of climate change. This is necessary to comply with regulation such as TCFD disclosures and the EU taxonomy for sustainable activities. Fundamentally, there is a business case for reporting emissions as climate change becomes one of the key risk factors for assessing business longevity and ESG investing has become mainstream. Furthermore, public sentiment – particularly among the under-40s – has shifted substantially towards a widespread acceptance that ESG should be a central concern for corporations, asset managers and banks. It is evident, that measuring Scope 1, 2 and 3 emissions is an important aspect for corporate accounting and will likely become increasingly so as regulation, public sentiment and business aligns more closely with the transition to a net-zero economy.