The SEC Left Out Scope 3 From Its Carbon Rules. Why It Still Matters.
By Ed Gabbitas April 9, 2024 1:11 pm
reprints
Discussions around Scope 3 carbon emissions have been heating up, and the Securities and Exchange Commission’s decision to remove them from its requirements for what U.S. companies have to report is the topic of the hour.
While it may seem like a relief for listed real estate companies not to have to report their Scope 3 carbon emissions at present, it’s crucial to grasp the urgency of the situation — and to view the SEC’s decision in context to understand why, ultimately, the agency choosing to drag its feet on Scope 3 may be meaningless.
Environmental transparency is rapidly gaining global importance, and real estate companies in particular are under pressure to report their carbon emissions to global capital market investors accurately. Leaders in real estate sustainability have a pivotal role in guiding other companies (for example,their tenants) through these regulations. The implementation of Scope 3 disclosure requirements is inevitable — particularly when viewed from a global perspective — and by complying with them, companies can provide stakeholders with a sense of security and support in the ever-evolving regulatory landscape.
At present, other global regulators — including Canada, the European Union, China and Singapore — have already enacted Scope 3 emissions reporting standards. At the same time, local and state legislatures for some of the largest centers of industry — like California with its SB 253 and New York City with its greenhouse gas targets — have either already adopted a plan for Scope 3 emissions reporting or are zeroing in on it.
Essentially, this casts the SEC’s decision as, at best, regressive, and will likely leave U.S. businesses scrambling to catch up to what is an inevitable wave of global reporting.
Therein lies the grave danger of U.S. industry leaders being blindsided.
Scope 3 emissions encompass a broad range of data throughout the entire business value chain, as per the Greenhouse Gas Protocol Scope 3 Emissions Guide. Considering the various sources of emission reports, it becomes challenging to not only collect all the private data but also ensure the accuracy of those reports. With Scope 3 making up to 80 percent of emissions, investors are essentially “flying blind” with only Scope 1 and 2 emissions data.
It’s imperative, then, that companies provide accurate data to represent them. Proper data collection and management are essential not just to meet stakeholder expectations but also to comply with government regulations. While these regulations may not be immediately in effect, not reporting could lead to reputational damage at present, loss of investor confidence, and even legal repercussions in the future, underscoring the urgency and importance of this issue.
To reduce the impact of emissions, organizations first need a proper process to outline risk-management procedures for identifying and evaluating climate-related risks. One crucial aspect of this outline is highlighting how to determine the significance of climate-related risks compared to other risks. Reviewing the British-born Task Force on Climate-Related Financial Disclosures framework is a good starting point for companies to quickly familiarize themselves with disclosure requirements and the reporting process.
Second, organizations must describe their process, including the necessary steps to manage all noted climate-related risks. Data management platforms can help with monitoring data and analyzing areas that require additional efforts and planning. Risk identification and management are both critical in developing actionable plans to meet future government and investor compliance regulations.
As a final step, companies need to understand what Scope 3 emissions data they have available and how it is being collected, and determine any gaps in that collection. By using a data management tool, data collection can be streamlined for analysis and reporting to shareholders, tenants, suppliers and the government. From there, businesses can assess benchmark performance and start taking steps toward reducing emissions. While collection and disclosure are great initial steps, action is key to enforcing change.
While the recent SEC decision may temporarily hinder mandatory Scope 3 reporting in the United States, it doesn’t diminish the importance of working toward a sustainable future. Real estate companies that take a proactive stance, investing and collaborating with stakeholders to reduce their carbon footprint, will be better prepared to navigate the constantly changing regulatory environment. This not only positions them as leaders in the industry but also contributes to a more sustainable future.
So, don’t just follow regulations, be a leader in shaping a sustainable future.
Ed Gabbitas is founder of consultancy and software platform Evora Global and a 20-year veteran of ESG consulting.
