Frequently, when questioned over inaction on climate change, business leaders say they are waiting for clear, standard guidance from governments and regulators on how to tackle the issue. That guidance is now imminent, but it won’t come without costs for business.
This month the EU is expected to reveal the final set of European Sustainability Reporting Standards and, later this year, the U.S. Securities and Exchange Commission is due to implement its new regulations for climate disclosures, compelling U.S.-listed companies to declare Scope 3 emissions and prove they are making progress on environmental goals.
“That is a huge challenge for the community,” says Donavan Hornsby, chief market strategy officer at ESG digital solutions provider Benchmark Gensuite. “It's one thing to try to understand the risk for your own operations, but now you're trying to look at risk and emissions associated with your value chain, and that’s a whole different beast.”
The onerous challenge of documenting Scope 3 emissions—that is, emissions generated by a company’s upstream and downstream supply chains—is one of the reasons why some industry groups are lobbying against the SEC’s rules. Not only will reporting on Scope 3 emissions make certain industries look like extremely heavy polluters, but documenting those wider emissions also will draw capital and money away from a company’s primary operations.
“Compliance is always seen as a cost,” Hornsby says, noting there is always pushback from businesses when a new regulation requires companies to divert resources away from what they see as their core business. But, Hornsby adds, there is also economic opportunity in meeting climate compliance that companies would be smart to recognize.
For a large business, chasing down Scope 3 emissions will require the company to establish far keener oversight of its supply chains than most businesses have today. There’s a steep upfront cost in developing that map, but (as I’ve written before) doing so will help companies spot unknown inefficiencies in their operations.
Investors and socially conscious job seekers, Hornsby says, are likely to find companies that demonstrate control over their climate risk more attractive too, meaning climate-compliant companies are going to find it easier to attract capital and talent. And, benefits aside, the new regulations from the SEC and the EU also will establish “hefty” fines for companies that fail to comply, establishing a cost point for greenwashing.
“Suddenly you're having to look at your sustainability efforts with the same level of rigor as you have your financial accounting, and that's totally a game changer for a lot of folks,” Hornsby says.
Hopefully, that new rigor will bring the clarity business leaders say they need.
Eamon Barrett
eamon.barrett@fortune.com
