On March 21, 2022, the U.S. Securities and Exchange Commission (SEC) introduced a landmark proposal requiring companies to include climate disclosures in their annual filings. The move responds to activist calls and investors’ increased information needs regarding the climate resilience of publicly traded companies. If the proposed rules come into effect, companies would be required to disclose their level of climate risk exposure and greenhouse gas (GHG) emissions not only for their own operations but, for large entities, across their supply chain. To meet the proposal’s requirements, reporting companies’ sustainable procurement function will play a key role in gaining the supply chain insights needed. Building supply chain visibility and adopting climate-related risk management strategies will provide businesses with the dexterity needed to respond to the new provisions and secure their resilience against existing and potential climate threats.
Domestic and Foreign Companies To Report on a Range of Climate Risks
The SEC’s proposal on climate-related disclosure applies to companies of all sizes that are publicly listed in the US, both domestic and foreign. The proposed rules would require registrants to disclose their processes for identifying, assessing and managing climate-related risks. Liable firms would be required to outline how they incorporate these processes into their risk management system and how any climate-related risks have had, or are likely to have, a material impact on their operations. The proposition would also mandate companies that have publicly set climate-related targets to detail the scope and time horizon of these goals and how they intend to achieve them. Companies would be required to report on the effect of climate-related events and their transition plans on the line items in their consolidated financial statements, financial estimates and forward-looking statements and the assumptions applied in their financial statements. Finally, the proposed ruling would require all companies to disclose their Scope 1 and 2 emissions, and large companies to disclose their Scope 3 emissions if material.
Disclosing Scope 3 Emissions and Intensity With Cross-Functional Collaboration
Scope 3 emissions are the indirect emissions, both upstream and downstream, that occur within a company’s value chain. While difficult to monitor and manage, these emissions represent the lion’s share (80-97%) of a company’s total carbon footprint and addressing them is crucial to decarbonizing global supply chains. The SEC’s proposed rules could require companies with an aggregate worldwide market value of common shares held by its non-affiliates of $75 million or more to provide a separate GHG attestation report prepared by an independent GHG verification provider starting from the reporting year 2023 or 2024, depending on company size. Given the depth of their supply chains, many large organizations find it challenging to account for Scope 3 emissions – a task that requires cross-functional collaboration at the intersection of procurement, sustainability and finance. However, tracking this type of emissions data does not have to be complicated or expensive. With the right technology and supplier capacity-building strategies in place, collecting large data sets becomes manageable. Furthermore, by measuring Scope 3 emissions, businesses can position themselves to anticipate forthcoming regulatory changes, future-proof their products and procurement policies, identify emissions reduction opportunities, detect and stop efficiency leaks, mitigate brand or reputational risks, and identify new prospects offering goods and services with lower carbon footprints.
Building Suppliers’ Reporting Capacities in Line With the GHG Protocol and TCFD
The SEC has modeled its proposal on the Task Force on Climate-related Financial Disclosures (TCFD) framework and the GHG Protocol. The TCFD provides a framework for voluntary, consistent climate-related risk disclosures to help investors evaluate companies’ climate risks and make better-informed decisions on directing capital. It has broad support across 93 jurisdictions worldwide. The GHG Protocol is a global, standardized framework for measuring and managing GHG emissions across all sectors and supply chains. Companies in search of independent ratings or assessments should look for approaches that incorporate the GHG Protocol or TCFD, if not both, since voluntary climate disclosures, such as the CDP, GRI and SASB, have adopted and integrated the TCFD recommendations into their respective frameworks. Integrating industry-leading standards into GHG reporting is key for companies, not only for their own reporting but also for building the reporting capacity of business partners and collecting quality data along the supply chain. This is essential as many suppliers currently lack reporting capacity and the necessary technical skills. To meet the proposal’s reporting requirements, industry leaders are now starting to get their suppliers ready and position them to disclose their GHG emissions in line with industry-leading reporting standards – a collaborative process that requires a proactive sustainable procurement strategy.
Risk Management and Mapping Strategies to Anticipate Supply Chain Disruptions
Beyond emissions reporting, the proposed amendments would also require businesses to communicate their processes for identifying, evaluating and controlling climate-related risks and outline how they are incorporating them into their overall risk management system. This requirement is particularly relevant in the current landscape of rising market volatility, rapidly evolving sustainability regulations and intensifying climate-related shocks.
Industry leaders have started to assess their multi-tiered value chains to identify and manage emerging and critical supplier risks. This enables companies to structure their supply chains to manage multiple, interrelated forms of risk – including climate change, human rights and ethics-related risks – and to ensure that the impact of disruptions can be controlled and limited to sections of the supply chain. Second, detecting potential risks across the value chain improves efficiency and performance, which translates to cost savings since companies can respond to risks or disruptive events with agility. This, in turn, helps companies secure stakeholder confidence, protect brand equity, develop better procurement strategies and maintain business continuity.
Visibility and Supplier Capacity Building as the Path to Compliance and Beyond
The proposed rules, if approved, would require large companies in the US to disclose their Scope 1, 2 and 3 emissions data, as well as climate-related risk management plans and processes. To meet these requirements, businesses must gain visibility into their entire supply chain, including around the activities, linkages and relationships of their suppliers, and track quantitative performance metrics to facilitate climate disclosure. Acquiring the data needed to report requires not only supplier engagement and capacity building but also the right tools to access and manage supply chain insights.
Companies can use the EcoVadis solutions to gain a comprehensive understanding of the sustainability performance of their suppliers and identify and manage risks. EcoVadis Sustainability Ratings enable businesses to compare supplier performance and identify and prioritize engagement with high-risk suppliers. If supplier assessment identifies emerging or critical risks, the Corrective Action Plan tool provides businesses with a framework to collaborate with their supply chain to address these risks and improve performance, forging a path toward meaningful capacity building. This, in turn, enables business partners to prepare effectively for upcoming transparency requirements.
Furthermore, the EcoVadis Carbon Action Module enables companies to gain targeted insights into their suppliers’ GHG emissions and carbon management practices, including insights useful for their own Scope 3 reporting. Through integrated metrics and tools such as the dedicated Carbon Calculator, the Carbon Action Module builds supplier capacity on GHG reporting and helps requesting companies gain high-quality data on their suppliers’ performance.
The market volatility and widespread disruptions brought on by the pandemic, compounded by intensifying climate shocks, have illustrated our deep interdependence with supply chains and the importance of containing disruptions and proactively building resilience. The SEC’s ground-breaking climate disclosure proposal signals that companies can no longer ignore Scope 3 emissions or overlook the importance of managing climate risks throughout their supply chains. Stakeholders must ramp up their collaboration to drive meaningful action and integrate climate-risk strategies that shock-proof and future-proof all aspects of their business. While this will be challenging for all companies, those that take proactive steps now will gain competitive advantages over their peers
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