Thanks to increased customer and investor demand for transparency, corporate environmental reporting is at an all-time high. In 2022, nearly 20,000 companies representing half of global market capitalization disclosed through CDP alone. Countless others are aligning their reporting efforts with frameworks like TCFD, SASB, and GRI.
While this kind of reporting has historically been voluntary, often at the behest of financial institutions, big changes are just over the horizon. The US SEC is expected to finalize its climate disclosure ruling early this year, making environmental reporting mandatory for all public companies.
Whether voluntary or mandatory, it’s safe to say that the 2023 environmental reporting season will be one of the most influential yet.
Your business should start preparing now to get ahead of the curve. Read on to learn about common gaps in environmental reporting, how to fix them, and strategies to get your house in order for 2023.
Current Gaps in Corporate Environmental Reporting
Based on what we saw in last year’s environmental reporting, where do businesses need to do better? Here are four common reporting gaps we noticed:
1) Climate-Related Financial Risk Assessments
While businesses are overall more aware of what their climate-related risks and opportunities are, few can quantify what that means financially. For instance, if you’ve identified that your business is prone to flooding and sea level rise, what will it cost to relocate three of your manufacturing facilities?
Right now, businesses have a qualitative understanding of climate-related financial risks – they know that climate change does indeed pose a risk to their operations, but not what it’ll cost or how they should brace themselves financially to mitigate those risks.
To boost resilience in an uncertain future, climate needs to be incorporated into your budgeting, financial strategy, and decision-making processes. Without being able to translate risk to dollars, your planning efforts will fall short.
2) Scope 3 Emissions Reporting
Scope 3 emissions, or value chain emissions, often account for 80-90% of a company’s total GHG impact. Because they stem from activities you don’t directly own, such as manufacturing and consumers’ use of your products, Scope 3 emissions are much more challenging to measure, report, and manage than Scopes 1-2.
That said, tackling Scope 3 is critical if we want to keep the 1.5°C dream alive. The good news is that businesses are becoming increasingly aware of the importance of Scope 3. We noticed a significant uptick in reporting on the operational categories of Scope 3 in 2022, such as business travel, waste, and employee commuting.
What we need to see more of is analysis and reporting on the harder-to-quantify purchased goods and services, or emissions from the creation of products deep within your supply chain. This is the most influential Scope 3 category for many businesses.
3) Cohesive Environmental Reporting Strategy
Environmental reporting is becoming the new business normal, which is great to see. After all, what gets measured gets managed. However, with so many reporting frameworks out there, we’re noticing that some companies are publishing materials without knowing why. To put it simply, they’re satisfying the requirements of various frameworks to check a box.
This leads to duplicative efforts, process inefficiencies, and more importantly it distracts you from doing the work that actually drives meaningful progress on corporate sustainability. Remember, more isn’t necessarily better when it comes to reporting frameworks. Some are better equipped than others to help you bake sustainability into your company’s DNA.
To avoid this pitfall, adopt a cohesive reporting strategy that encompasses all the frameworks you use. Take time to consider your goals when it comes to each. Will your reporting efforts result in a more resilient business model? Also be sure to find ways to consolidate information. For instance, one of our clients compiles the information they need for all the frameworks they report to in one ESG report. Later in the year, when they report to CDP, they copy and paste relevant information from their main report.
4) Data Quality
Another area of environmental reporting that needs improvement across the board is data quality. More so than in the past, reporting agencies and frameworks like CDP and TCFD are looking for specificity over industry averages. In the case of CDP, the platform is not only asking for but also rewarding specificity with better scores.
What might this look like in practice? For reporting on purchased goods and services, this means using on-site data for your product life cycle assessments (LCAs). When it comes to supply chain engagement, it means asking your Tier 1 suppliers to disclose their emissions and environmental data through platforms like CDP and EcoVadis, and getting them to engage their own vendors so you can get insights beyond Tier 1.
How to Improve Your Environmental Reporting
Is your business experiencing one or more of the reporting gaps listed above? Or are you simply looking to act on environmental risks and opportunities in a more meaningful way? Here are five things you should start doing now to get your affairs in order for the 2023 reporting season:
1) Expand ‘Environmental’ Beyond Climate & GHG Emissions
Greenhouse gas emissions reduction may be the poster child of corporate environmental action, but climate isn’t the only ‘E’ topic you should be worrying about. Climate change is tightly linked with two other pressing issues – biodiversity loss and water risk. Here are a few quick tidbits to know about each:
- More than half of global GDP relies on nature – destroying natural capital is often synonymous to destroying business capital.
- Biodiversity loss is a primary driver of climate change – the degradation of nature for agriculture and other uses accounts for 23% of total GHG emissions.
- 1 in 5 businesses could face significant operational risks due to collapsing ecosystems.
- If consumption and production patterns don’t change, the UN predicts a 40% global shortfall in water supply by 2030.
- In certain high-risk sectors, water risks cost 3x more per year than carbon risks, and companies in energy, utilities, and mineral mining have already lost billions from stranded assets.
Both of these issues expose businesses to a huge set of risks. It should come as no surprise then that investors are already paying close attention. While 2022 was heavily focused on climate disclosure, nature- and water-related risks are next up on the docket. Start taking steps now to understand, mitigate, and formalize metrics to report on biodiversity and water risk year over year.
2) Align Efforts with TCFD
Although 2022 started out as a ‘wild west’ of reporting frameworks, TCFD is emerging as the go-to organizing body for climate disclosure. Proposed climate reporting rules in the UK, Japan, Singapore, Canada, Australia, and more recently the US all build on its four pillars of disclosure.
Standardization benefits aside, using the TCFD framework is a proven way to evaluate the financial implications of climate change on your business. As mentioned earlier, climate-related financial risk assessment is one of the biggest gaps we see in today’s reporting, and it’s also one of the biggest threats to long-term business viability.
By focusing on bottom-line impact, TCFD encourages you to engage on a more intimate level, rather than just “responding” or checking boxes. This makes it a crucial tool for the effective management of any company.
3) Engage Your Suppliers on Scope 3 Emissions
Increasing stakeholder pressure and emerging regulation around GHG emissions disclosure are highlighting the need for better data and reporting on Scope 3. To gather the high-quality data your investors are looking for and reduce your Scope 3 impact, supplier engagement is a must.
For example, Microsoft now requires that suppliers have their GHG emissions data for purchases goods and services, business travel, and commuting verified by a 3rd party. Another way Microsoft is improving Scope 3 data quality is by embracing project-based emissions allocations. In other words, gathering more granular data from each of its suppliers rather than estimating emissions by spend.
However, this kind of engagement didn’t happen overnight. You can’t require something like 3rd party data verification without first opening up lines of communication and developing two-way relationships with your suppliers.
If you want to take action on Scope 3 and develop a more robust environmental disclosure, start engaging your suppliers today.
4) Conduct a Climate Scenario Analysis
Climate scenario analysis is one of the best tools out there for assessing your climate risks, both physical and transition. There are a number of scenario models available, from temperature-based scenarios to future energy makeup.
No matter what framework you choose, be sure the results of each scenario are linked to projected financial impact. For instance, if you modeled sea level rise under 1.5°, 2°, and 3°C of temperature increase, quantify the flooding risk of each scenario with dollars. Under 1.5°C of temperature rise, perhaps you’d just need to move critical equipment above the flood line, but at 2°C, you’d need to move your entire operations. What would each cost?
While not required outright by any of today’s disclosure frameworks, scenario analysis will help you not only boost resilience but also strengthen your response and align with other reporting efforts. We tell all our clients that climate scenario analysis should be thought of as a de facto component of sound business strategy.
5) Engage the Right Internal Stakeholders
2023 reporting deadlines might seem far away, but gathering data, gaining buy-in, and coordinating across departments always takes longer than you think. Here are a few examples:
- If you need to calculate a GHG inventory, start gathering data from various internal stakeholders, vendors, and partners now. This will help you confidently answer quantitative questions and give you a better understanding of where you are on the GHG reduction journey.
- If you’re conducting a climate risk assessment, engage with individuals from risk management, facilities, finance, sales, operations, and more – not just your sustainability team.
- If you’re publishing an ESG report or submitting a CDP questionnaire, reach out to legal and communications now to determine who needs to approve what and how long you should allocate for review cycles.
Bottom line – environmental reporting can’t happen in silos. Getting the right internal stakeholders at the table early will build momentum behind sustainability in your organization and ease the last-minute scramble before the deadline.
The Bigger Picture
While there are certainly lower touch ways to strengthen your disclosure and even boost your score, reporting shouldn’t just be seen as something you check off once a year and forget about.
The five strategies above were included because they’ll help you integrate environmental risks and opportunities more holistically into your overarching goals and business strategy. And more so than in previous years, that’s what today’s reporting frameworks are looking for.
Need help getting your house in order for this year’s reporting season? Whether it’s facilitating a scenario analysis workshop or engaging the right stakeholders in your organization, our team is happy to help. Get in touch with us here.