2023 TOP 10 BLOG

VJEL Staff Editor: Monica Nerz

COP 2022 and Scope 3 Emissions: Countries and Corporations MUST Get Back to 1.5C

The Paris Agreement set a target for nations around the world to “remain at or below 1.5°C pre-industrial levels.” This target was set to avoid the irreversible effects of a warming planet. On September 6, 2022, the Carbon Disclosure Project (CDP) and Oliver Wyman released a report finding that all G7 countries are failing to meet their corporate emissions reduction goals. (G7 countries include: Canada, Germany, France, Italy, Japan, the United States, and United Kingdom.) The CDP is a non-governmental organization that operates a global disclosure system for investors, companies, cities, and states to manage their environmental impacts. Oliver Wyman is a consulting firm that specializes in improving business organizational performance, risk, and operations. Here we discuss the current trajectory G7 countries are on, assess the temperature increases each country is expected to produce, and proposes rules that could reduce Scope 3 emissions.

The CDP is one of the founding organizations of the Science Based Targets initiative (SBTi). SBTi and CDP are working in tandem to assess effective corporate environmental sustainability solutions in accordance with the goals of the Paris Agreement. SBTi provides technical assistance to companies to create science-based emissions reduction targets. SBTi and the requesting company then assess whether the targets desired align with the Paris Agreement. Because nations around the world are falling short of their corporate emissions goals, SBTi recently issued more stringent criteria for its certification process when reviewing a company’s climate targets. Although emissions reductions targets are voluntary, SBTi will “only approve company targets that are aligned with the Paris Agreement target of 1.5°C.” Under SBTi’s new initiative, the “Net Zero Standard” assesses a company’s commitment; if they satisfy the 1.5°C target, SBTi will then certify its commitment.

SEC’s proposed “issuer rule” and “investor rule”: what do these rules mean?

This past year, the Securities and Exchange Commission (SEC) proposed a new rule in March pertaining to environmentally-focused disclosure requirements for publicly traded companies. This rule is called the “issuer rule,” which would require public companies to provide certain climate-related data pertaining to finances and greenhouse gas emissions in the companies’ public disclosure filings such as a company’s annual “Form 10-K.” Part of the issuer rule will require companies to disclose information on emissions they produce directly. The issuer rule will also incorporate “disclosure of information related to emissions from a company’s value chains.”

The SEC also proposed the “investor rule” this past May. This rule focuses on environmental, social, governance-related (ESG) funds and firms will be required to provide information on the specifics of their ESG strategies in files such as annual reports. If adopted and finalized, these rules will be critical to future disclosures from publicly traded companies. Disclosures will better reflect their emissions data and how the U.S. can assess whether its are on track to meet the Paris Agreement.

The Scoop on Scope 3 Emissions

Scope 3 emissions stem from value chains. Value chains consist of various business activities involved in producing a product or carrying out a service. For example, a product could consist of several stages “of the product’s lifecycle,” ranging from sales, procurement, after sales services, and everything in between. As a result, this category of emissions represents on average, six times the total volume of Scope 1 and Scope 2 emissions. If adopted, the SEC’s proposed rules could better enforce Scope 3 emissions disclosure and change current emissions patterns and reporting.

Scope 3 emissions are emissions that are not directly part of the company’s own Scope 1 and Scope 2 emissions. Scope 3 emissions are typically attenuated from the company’s actual production of a product. For example, emissions that fall under the Scope 3 category include: transportation and distribution, waste generated in operations, and capital goods. However, Scope 3 emissions for one company may be another company’s Scope 1 or Scope 2 emissions. Scope 3 emissions tend to represent a majority of a company’s total emissions. Thus, targets incorporating Scope 3 emissions tend to be less accounted for—which is exactly why corporations should be required to account for Scope 3 emissions in their disclosures—while simultaneously working to reduce the corporation’s Scope 3 emissions.

When Scope 3 emissions are included with Scope 1 and Scope 2 emissions, analysis will show warmer temperatures in almost all sectors and regions. Currently, only a whopping “43% of Scope 1 and Scope 2 emissions are reported globally.” Whereas, “publicly reported emissions reduction targets cover only 26%” of Scope 3 emissions. If the U.S. SEC adopts its proposed rule, this could effectively influence other nations to follow suit in requiring Scope 3 disclosure.

Based on Current Temperature Projections, 2022 is Missing the Mark

CDP provided a report assessing 4,000 publicly traded companies globally and their disclosures to determine whether the companies’ current corporate emissions reductions goals are bold enough to satisfy the Paris Agreement’s 1.5°C Protocol. The report also reviewed the trajectories for global warming through a science-based approach. Egypt recently hosted this year’s COP 27; one of the goals of this conference was to ensure that the 1.5°C target remained a top priority. Concern looms from G7 countries, who currently produce the highest emissions due to the limited number of adopted targets from private companies. Thus, requiring G7 countries to set effective emissions targets in private sectors will be key to reducing emissions. Pursuant to this goal, one positive takeaway from COP 27 was the innovative finance model that “monetizes avoided or reduced emissions through carbon markets.” Under “Article 6 of the Paris Agreement,” countries are permitted to work collectively in raising funds for high priority decarbonization projects through carbon credit arbitrage in “regional and international markets.”

In view of the G7 corporate progress, France’s, Germany’s, and Italy’s corporate sectors are outperforming the remaining G7 countries. Although these European countries serve as a model for the remaining G7 countries, their emissions still exceed the targeted goal of 1.5°C. For example, across all of Europe’s regions and sectors only the power generation sector remains below 2.0° C, which is on track for a 1.9°C increase. The transportation services sector will require the most improvement in Europe, which is currently moving towards an 2.6°C increase. This still exceeds the Paris Agreement goal. Currently, the G7 countries are most likely to reach a 2.7°C temperature increase overall, falling far below the Paris Agreement goal by almost two-fold. Exceeding the Paris Agreement marker can be explained in part by global energy insecurities, inflation, and the costs of extreme weather affecting several regions around the globe.

Beyond looking at G7 countries and comparing their progress to Europe’s, other regions in the world such as Asia and North America are notably failing to keep up with Europe. Companies headquartered in North America are on a path to a 2.5°C increase in temperature. Similarly, companies headquartered in Asia are on a path to a 3.0°C increase. Sectors such as the power generation sector vary significantly between: Europe, North America, and Asia. (1.9°C, 2.1°C, and 3.0°C respectively). Differences in temperature pathways amongst Europe, North America, and Asia could be due to limited emissions targets. Amongst the three continents, data suggests that the limited amount of emissions targets could be because of a lack of uniformity and financial stability. One sector that faces particularly difficult barriers is the materials sector. The materials sector operates and distributes supply globally, therefore companies in this industry struggle with improving the industrial processes. (Think of steel and cement production). However, continental targets are based on a company’s degree of ambition on how they want to administer its production processes.

Conclusion

To conclude, both countries and companies within them are increasingly adopting science-based targets as a mechanism to reduce corporate emissions. Having this mechanism will undoubtedly provide a positive impact on anticipated emissions trajectories as more countries adopt science-based targets. One of the major barriers to fully curbing current emissions patterns is the global miscounting of Scope 3 emissions stemming from production, distribution, transportation processes, among others, in its entirety. However, should the SEC adopt its proposed rules to enforce corporate emissions disclosure, this will put the United States (one of the countries anticipated to surpass the 1.5°C target) on track to better account for corporate emissions. With this proposed rule, comes the potential to influence the remaining G7 countries to adopt a similar disclosure rule.