Beyond Compliance: The Many Drivers of Carbon Accounting

Compliance with the upcoming SEC climate disclosure rule is a priority for you and your organization – otherwise you probably would not be reading this primer.  Don’t fret, we’ll get to the nuts and bolts of the SEC rule and how to comply shortly.  

But first, it’s worth looking at the reasons why a company might want to measure and disclose its carbon footprint, beyond just compliance.

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18,000+ companies already voluntarily self-report climate-related data to the CDP, representing half of global market capitalization.  But why?  We observe a spectrum of corporate motivations for disclosure, ranging from proactive to reactive.

On the proactive side of the spectrum, some companies are built on a mission of sustainability and decarbonization as core principles. These companies proactively measure and report their footprint as an act of goodwill in keeping with their corporate ethos.

On the reactive side of the spectrum, some companies will be focused on reporting to meet investor, customer and other stakeholder demands. Beyond voluntary reporting, companies are increasingly motivated by regulatory compliance, and the desire to avoid litigation, sanctions and other scrutiny.

All of these motivations are certainly valid, and along the spectrum of drivers lies a variety of other motivations, most of which are actually driven by market forces, and offer the incentive of potentially significant upside to revenue and profitability. 

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Let’s take a closer look at the motivations along this spectrum, again starting on the proactive side and moving toward regulatory compliance:

• First, as mentioned, Core mission of sustainability - Some companies choose to operate sustainably on principle. Measuring and reporting allows them to showcase their principle-led activities, and perhaps to inspire other companies to do the same.

• Net zero commitments - Many companies make public commitments to reduce their footprint, often in response to market demand and to keep pace with competitors. A proactive and credible report on their progress supported by reliable data helps to tell the story, and to stem any unease about ‘greenwashing’.

• Stakeholder pressure - Customers, partners, employees, and other stakeholders have their own preferences and financial incentives to decarbonize and express them directly and indirectly via their purchase or partnership decisions. Consistent and reliable reporting can help appeal to these preferences and protect or promote revenue.

• Direct financial risk - Companies increasingly are experiencing direct profitability impacts from climate-related events and trends and wish to quantify and appropriately manage these evolving financial impacts - both taking advantage of the positive and mitigating against the negative ones.

• Capital markets - Investors and lenders are coming to expect a detailed picture of a company’s climate risk and decarbonization strategy. Consistent and auditable reporting can serve to satisfy these requirements and unlock funding opportunities.

• Regulated value chain - Companies that need to report their Scope 3 emissions may now require regular and consistently calculated emissions reporting from their suppliers and others in their value chain. Those suppliers will find increasing expectations to provide reliable emissions data in order to preserve the business relationship.

• And finally, Compliance - Companies see that regulations will make GHG emissions reporting mandatory and are calculating emissions data to satisfy regulatory requirements and avoid litigation, penalties and regulatory scrutiny.

As you can see, market dynamics serve as the motivator behind many of these drivers. Evolving regulations are a significant driver, to be sure. However, even without regulated disclosure requirements, it’s clear that the business landscape is evolving to incentivize transparency with respect to carbon emissions.

So yes, compliance is a powerful motivation for carbon footprinting and disclosure, but it’s only one of many drivers.  Many of the non-regulatory drivers focus significantly on meeting stakeholder demand and reaping the positive benefits generated by market forces.

Now, as an executive, you’re likely highly aware that establishing and supporting a climate disclosure program can require resources. Those resources and associated costs can come in the form of staffing an in-house team, hiring external consultants, procuring carbon accounting software, or likely some combination of the three.

Recognizing the broad range of market-driven financial upside laid out above, as well as the need to comply with emerging regulatory requirements can help you provide context to your leadership team to inform and justify the financial investment required for a carbon measurement and reporting solution.