Greenhouse gas reporting rules and pitfalls to be aware of

By Rich Goode and Marie Hache

In our recent article on technology, media and telecoms businesses’ greenhouse gas (GHG) emissions, we explained why it’s now imperative for the TMT industry to take climate reporting seriously. As highlighted, one of the key reasons was the imminent release of mandatory GHG reporting rules from the US SEC.

With exquisite timing, the SEC’s proposed rules have now been published in time for our second blog. At 510 pages, they’re pretty comprehensive – and are landing on the desks of CEOs across the TMT sector with a resounding thump. In many cases, their immediate response has been to call us for a conversation to see what it all means and how to take some meaningful first steps: in the first couple of weeks since the rule came out we’ve had many client discussions on the topic.

While the rule focuses on more than just greenhouse gas emissions, including disclosing the financial impact of climate related risks and opportunities, greenhouse gas emissions are on deck to be assured- and for large public companies, that can come as soon as their 2024 financial statement filing. So getting your GHG inventory in a place where it can pass an audit is an absolute must.

Consistent and comparable - the end goal

When it comes to GHG emissions, the SEC’s draft rule seeks to give companies guidance on what to include in their carbon footprint. The rule spells out things like how to determine what to measure and how to measure it, but stops short of requiring companies to use any particular GHG framework. However, since an overwhelming majority of companies use the GHG Protocol to calculate their emissions, and the SEC models their guidance on the GHG Protocol, it ends up being the de facto standard. The main goal of how the SEC wrote the rule is to allow both a consistent presentation of your GHG emissions, and allow interested parties to compare emissions from one company to another.

While Scopes 1 and 2 are required for all companies, including an eventual assurance requirement, Scope 3 is required to be disclosed “if material” to the company. While the SEC does not spell out what material means, they refer to the Science Based Targeting Initiative (SBTI) as a guide, which states that if your Scope 3 emissions are 40% or more of your combined Scopes 1, 2 and 3 they should be included. While there is no audit requirement over Scope 3 emissions and companies can claim safe harbor over Scope 3 disclosures since they have to rely on information from other companies and cannot guarantee their reliability, companies that have not calculated Scope 3 emissions before should get started right away since this is a substantial effort. For most TMT companies Scope 3 emissions will, in fact, be material. Any product that creates emissions over time (for example, charging cell phones or servers that run 24/7) is a Scope 3 emission, as are the numerous components companies purchase to make and deliver their products or services.

When it comes to determining what to include or exclude in your GHG inventory, the SEC did provide some clarification, which is that anything a company puts into its consolidated financial statements must also be covered from a GHG measurement perspective. There is a lot of subtlety and nuance in the rule, and lots more than GHG emissions. While adopting a recognized GHG measurement and accounting framework is key, it won’t guarantee compliance on its own. There are many pitfalls along the way that could derail a company’s GHG reporting but we highlight below three risks in particular when it comes to preparing to calculate your carbon footprint:

Pitfall 1: Excluding material activities or locations

The first is to be sure not to leave out any activities or locations that are included in a company’s consolidated financials under the SEC rules. 

Case Study
A TMT multinational had three major warehouses in a developing country. These operations were included in the group’s financial statements, but it proved impossible in practical terms to get any meaningful data on their GHG emissions. So the company simply left them out of its climate reporting without even mentioning the locations in any of their sustainability reporting.
Fast-forward to today, and such an approach could put the company at risk. To comply, it would either have to find a way to measure and report on the emissions from those facilities (for example, estimate emissions based on square footage), or state explicitly why they were not included. Going forward, transparency over any potentially material gaps will be important for companies to both be aware of and disclose in their filings.

Pitfall 2: Using renewable energy credits (RECs) and carbon offsets incorrectly

The second pitfall to avoid relates to the use of renewable energy credits (RECs) and carbon offsets. Many people assume these instruments are essentially the same thing. In fact they’re very different and fulfill very different functions.

What do they do? RECs can be used to offset your Scope 2 emissions, namely electricity purchases - since a REC represents that one megawatt-hour (MWh) of electricity has been produced and delivered to the grid. Carbon offsets are more flexible, certifying that one tonne of CO2 equivalent has been avoided or removed from the atmosphere. Offsets are more flexible than RECs in that they can be used to offset emissions from any category.

Pitfall 3: Failing to write everything down in an Inventory Management Plan (IMP)

The third pitfall is around record-keeping. In our recent article, we mentioned how important it is to maintain a formal record of your approach and methodology for GHG reporting. We often call this the “winning the lottery” issue. If, for example, the person your company relies on to calculate GHG emissions every year wins millions of dollars in the lottery and decides never to come back to work - can the company calculate emissions the same way the following year?

It is vitally important that companies create – and keep up-to-date – a document called an Inventory Management Plan (IMP), standard operating procedure, manual, or accounting policy. A robust and accurate IMP will be critical in enabling your business to consistently calculate your emissions and to be in better shape to deal with in an assurance of your GHG emissions. 

Coming up next

However, having a smooth assurance over your GHG emissions will also require several more elements. In the third and final article in this series, we'll take a look at the use of technology and some good, old fashioned accounting elements that are vital tools when it comes to making sure your GHG inventory is “investor grade”. In the meantime, if you’d like to know more or discuss anything that’s been covered so far, please get in touch. 

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Rich Goode

Rich Goode

Partner, Assurance, ESG, PwC United States

Marie Hache

Marie Hache

Director, Assurance, PwC United States

Tel: +1 (213) 217-3679