Astrid Wynne | June 23, 2023
Image credit: A_stockphoto/Shutterstock
One thing to note about ESG reporting is that you cannot really hide from it. There is a pincer movement from financial bodies and governments to make disclosures on the supply chain, energy and carbon mandatory for all but the smallest organisations. We can take you through what some of these regulations are called and where they apply as well as demonstrate that even those outside of the territories that have introduced them will need to take note on how to report. More importantly, we can outline what you need to measure and with which indicators to ensure that you are ready for what is coming next. If you collect the right data in the right way, you can use this to file into appropriate reports for compliance, investment and competitive advantage.
Carbon footprints are part of mainstream company compliance. All UK registered organisations with more than 250 employees have to report their carbon footprint and energy usage in their annual report to Companies House because of Streamlined Energy and Carbon Reporting (SECR). The Energy Savings Opportunity Scheme is for slightly larger companies and covers scope 1, 2 and 3 plus a reductions plan. Canada has a Net Zero Emissions Accountability Act that does something similar; California has a Climate Corporate Accountability Act proposed for 2024. The Securities and Exchange Commission in the US is proposing the same thing and France has a piece of legislation called BEGES (which is roughly translated an obligatory carbon accounting framework).
For all the above legislation, companies need to measure their carbon footprint in tonnes or kilograms alongside their overall energy usage in megawatt hours or kilowatt hours. Carbon footprints will be a minimum of scope 1 (direct greenhouse gas emissions and their carbon intensity), scope 2 emissions associated with electricity usage and scope 3 emissions associated with the upstream and downstream supply chain. Full guidance on these is available through the Greenhouse Gas Protocol. A full carbon footprint is difficult to assess with the supply chain emissions added in, so the best advice is to calculate what you can as soon as possible, be transparent about how you came by the data and what assumptions you made, and commit to building knowledge on your carbon footprint as you try and effect reductions. You will need to record your energy usage in gas and electricity alongside this, even if it is low carbon energy.
There are a number of legislative bodies asking for traceability reporting and due diligence in their supply chain. The environmental part of the equation for the electronics industry is around the EU’s list of critical raw materials, and the critical minerals list from the US Federal Register. It ties to the circular economy approaches encouraged by governmental Circular Economy Action Plans, and is the rational for organisations to demonstrate reuse, product life extension and responsible disposition at the end of life. Companies have to practice social responsibility too. In order to comply to the CSRD regulations, organisations will need to demonstrate they have codes of conduct for themselves and their supply chain, human rights, labour, environmental and anti-corruption.
The UN Global Compact provides guidance on supply chain sustainability and traceability. Their guide on continuous improvement in line with the 10 Principles is available online at their website. Other premade codes of conduct are available through organisations such as the Responsible Business Alliance. Indicators include clauses around bribery, human trafficking, freedom of association, child labour and pollution. Although the issues will be the same for all organisations, the risk profile will change according to the sector, where the supply chain is located and the materials in that supply chain.
The EU has stated its aim to bring biodiversity protection and restoration into the mainstream with the CSRD directive and other legislative moves. The UK has followed a similar path with the Environment Bill. Australia already has a Biodiversity Offsets Scheme as a result of its Biodiversity Conservation Act 2016.
The principles associated with this are that natural assets should be incorporated into financial reporting, and that negative impacts on biodiversity as a result of business operations should be compensated by the company that inflicts the damage so that there is no net loss of biodiversity or even a net gain in biodiversity. In order to understand the risk, projects need to include environmental reports that look at habitats and protected species affected. An approach that prioritises avoidance, minimalization, restoration and compensation in that order needs to be demonstrated and executed.
Alongside this, there is a raft of legislation around reports to investors. These are arguably much more powerful. The EU Taxonomy regulation comes into effect this year and covers climate as well as carbon risk, which means companies need to understand and report on climate adaptation, mitigation, sustainable use of water and marine resources, circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. The UK Taxonomy regulation will follow a similar path given that the groundwork was laid before the UK left the European Union. New Zealand has a similar piece of legislation in the Financial Amendment Bill, and Singapore has established a Green Finance Industry Task Force. A Corporate Social Responsibility Directive (CSRD) is under development, which will extend carbon, social impact, diversity and governance regulations.
The Carbon Disclosure Project is the gold standard for carbon measurement and reduction plans. The Global Reporting Initiative is the most comprehensive and well-known sustainability reporting guidance that covers the triple bottom line of People, Profit and Planet for companies and articulates how well they are doing on Sustainable Development. Free-to-use tools are available online. For articulating this to investors, the Integrated Reporting Framework (IFRS) has the backing of the International Accounting Standards Board (IASB). There are also industry specific certifications like Ecovadis, used in the US, and B Corp.
Which reporting framework organisations you choose to align with depends on size, sector, geographical presence, sustainability maturity and where your current and future funding comes from. There are slight differences depending on audience and approach. That said, the fundamentals are the same. All but the smallest companies need to understand where they are with climate, biodiversity and supply chain risk and be taking steps to manage this. Being proactive on this allows you to get ahead of compliance and also to create a competitive advantage on investment.