Do You Know How to Discuss Your Scope Emissions with Investors?

It’s time for companies to get serious about discussing their scope emissions. That’s because in 2023, a proposed Securities and Exchange Commission (SEC) regulation requiring disclosure of this information is likely to be passed along with a number of other SEC rule changes. The implications will be far-reaching. 

What the SEC Proposed

The rule would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, such as on Form 10-K. Although many businesses already disclose sustainability data, the SEC would make sustainability reporting mandatory.   

The proposal, known as “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” was made in March 2022, as we discussed on our blog. This important detail caught the eye of many investor relations officers (IROs) everywhere: 

The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.  

The requirement to disclose details about Scope 1, 2, and 3 emissions emerged just as many publicly traded companies were grasping the requirements of scope reporting.  

What Are Scope 1, 2, and 3 Emissions? 

Companies categorize Scope 1, 2, and 3 to distinguish between the different ways they produce emissions that contribute to greenhouse gases. Greenhouse gases are gases in Earth’s atmosphere that trap heat. They let sunlight pass through the atmosphere, but they prevent the heat that the sunlight brings from leaving the atmosphere. We need greenhouse gases to keep the Earth from becoming too cold. But scientists are concerned that human-produced emissions are adding too much of these gases to the atmosphere, leading to potentially catastrophic changes to the environment.  

Hence, businesses are increasingly being held accountable for how they contribute to greenhouse gases through their emissions. 

     Scope 1

• Emissions are direct emissions from sources that are owned or controlled by an organization, such as emissions from combustion of fossil fuels in boilers or vehicles. 

     Scope 2

• Emissions are indirect emissions from the generation of purchased electricity, heat, or steam that are consumed by an organization. 

     Scope 3

• Emissions are all other indirect emissions that occur in a company's value chain, such as the production of purchased goods and services, employee commuting, and waste disposal. 

Knowing these categorizations helps organizations quantify their total greenhouse gas emissions pinpoints to reduce emissions from their own operations as well as their supply chain. 

What Should Businesses Do? 

The SEC rule change is an opportunity for businesses to communicate their commitment to sustainability with metrics-based information. Many businesses around the world have been doing so already.  

We have asserted on our blog that your sustainability goals can only be achieved when your approach is a fully integrated part of your wider business strategy. And it can only happen by working with others within a company’s stakeholder ecosystem, including your suppliers, which is where various levels of Scope emissions reporting apply. Demonstrating how you are building those connections and integrating your approach is essential to successful communications.   For companies, that starts with aligning corporate strategy and ESG strategy using their purpose as the North Star to bring the two together. Investis Digital clients Vodafone and Pearson are great examples of companies that have done just that and do a good job of explaining how their purpose guides everything they do on their websites.   

Every IRO knows that their investors are increasingly interested in climate change and the risks and opportunities it creates for their business. According to PWC, reducing Scope 1 and 2 emissions ranks as investors’ highest ESG priority. But many businesses lack a dedicated climate or carbon page. This situation will change as investors – and regulations from bodies such as the SEC -- increase the pressure to manage the impact and risks of climate change.  

Increasingly investors are interested in a company’s Scope 3 emissions, too.  Of course, for companies to reduce their Scope 3 emissions, they must work with, set standards for, and collate metrics from across their value chain. And reporting on Scope 3 emissions in a transparent way actually opens up some fascinating opportunities for communicating to investors. For instance, VF Corporation publishes an interactive map that makes it possible for analysts and consumers alike to obtain information about every business involved in the production of a pair of trainers or insulated jackets, from raw material to manufacture and distribution. For every business, they provide not just a name and address but information on workforce composition, working conditions, and worker welfare programs.   

It’s clear that supply chains are going to come under increasing scrutiny as companies look to reduce their environmental impact, increase their social impact, and reduce their risk exposure. This pressure only heightens the need for businesses to report on Scope 1, 2, and 3 emissions in a more coherent way. We suggest that businesses learn from each other about how to report on their sustainability commitments in ways that inspire investor trust. In our 2022 blog post “Website Content That Resonates with Investors,” we detailed many best practices for sustainability reporting that are as relevant as ever. In it, we discuss how to share roadmaps for reducing Scope 1, 2, and 3 emissions. 

Bottom line: changes in SEC rules reflect investor expectations. Successful businesses can and should build trust with investors by showing, with a credible narrative, how they respond to a changing world.

Contact Investis Digital   

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