The Securities and Exchange Commission issued a proposal in March requiring SEC registrants to standardize disclosure for climate-related business risks. In addition to broader climate-risk disclosures and metrics, the proposal would require registrants to report direct (Scope 1) and indirect (Scope 2) greenhouse gas (GHG) emissions in their filings. Importantly, it also requires some companies to report Scope 3 emissions (i.e., indirect emissions that occur in the upstream or downstream activities of a company’s value chain and are not otherwise included in a company’s Scope 2 emissions).
The proposed climate disclosure rules could exert enormous change upon engineering and construction (E&C) contractors, placing them squarely on the front lines of a regulatory-driven societal campaign to measure and, ultimately, reduce and mitigate the effect of GHG emissions — considering that some 40% of GHG emissions are produced by the built environment.
The proposed rules would require E&C firms to measure and report GHG emissions produced by the projects they build, potentially requiring any contractor or EPC project carried out for SEC-regulated public companies to create and maintain a carbon ledger for tracking and disclosing emissions throughout the entire project development process. The rules will also likely increase opportunities for E&C firms to offer additional services, such as forecasting or monitoring GHG emissions for the life of a structure through “net-zero-as-a-service” or other carbon measurement, forecasting or reduction strategies for their customers. E&C firms and their customers should keep in mind that, while the GHG footprint of an asset may be a large contributor to a company's net-zero goals, it is only part of the carbon operating system required to comply with the proposed guidance for SEC-registered companies.
Whether this is good news or bad news for E&C firms depends upon where they sit on the emissions-reporting maturity curve. We believe E&C firms will need to accelerate certain efforts already underway in the industry to position themselves to be at the center of these proposed rules, or risk playing catch-up or being stuck on the sidelines.
Leading E&C firms have already pushed to build “greener” assets. This pivoting on numerous operating-model fronts to green-up projects — from decisions around where and what building materials they source, the means and methods used for construction, to applying energy efficient equipment and cleaner power sources during construction. Firms that specialize in reducing carbon emission during engineering, procurement and construction activities and in lowering the carbon footprint of the assets (facilities) they build — from an oil refinery to a Manhattan residential tower — will no longer be considered an industry premium. Carbon emission reduction will likely become an expectation.
The proposed rules can open new areas of growth for E&C firms that can design and operate through a carbon-reduction lens. But doing so will mean going beyond integrating energy efficiency design and using less carbon-intensive materials and processes. Lowering emissions will also mean developing digital threads from concept through construction and operations, and creating tools and services that measure (and ultimately lower) carbon emissions in all aspects of project development.
Some E&C front-runners are already leading the pack by developing more agile, digitally driven operating models, gaining advantages over their industry peers by responding to market demands and delivering cleaner energy, cleaner projects and the ability to model and help reduce the carbon emissions (Scope 1 and Scope 2) footprint of facilities before they are even built. And, most importantly, they are beginning to position themselves to model, cut and measure Scope 3 emissions not only for their own operations, but also for the owners and operators of their customers’ assets.
While E&C firms may find complying with the proposed rules a trying undertaking, those firms that successfully shift to a mindset of innovation could be rewarded by new revenue streams linked to net-zero-as-a-service offerings, which we believe will be in very high demand. Accelerating such innovation will mean developing an array of new capabilities, and we expect E&C firms to ramp up new capabilities and talent through acquisitions, alliances and partnerships. As more and more customers demand more carbon-reduction and GHG emissions tracking and reporting services, we believe we will also see more intense competition within the sector to provide those services. Just consider this excerpt from the SEC proposal:
From a market-wide context, mandated climate disclosures may heighten demand for certain data or third-party services related to preparing the required disclosures, including assistance with the reporting of emissions data. In the short term, there could be a potential increase in the prices of such services to the extent that the initial growth in demand exceeds the supply. In the long term, however, this heightened demand is expected to spur competition, innovation, and other economies of scale that could over time lower associated costs for such services and data and improve their availability.
Many E&C companies know they will need to change to stay competitive and relevant. However, many still need to prioritize what they need to do over the next two years and beyond, in order to adapt and align project development with evolving standards, market demands and expectations.
While the SEC’s rulemaking on climate disclosures may help foster comparable, consistent climate information, this information will be publicly reported and it’s our belief that stakeholders will expect the same quality they expect from their financial disclosures.
These proposed rules, if passed, could be a lot for some E&C firms to digest. They’ll need to ask some tough questions about their preparedness on numerous fronts. Below are some of the biggest and most pressing ones.
Are you ready to….