Compliance, Decarbonization, and Scope 3 - Tips from a CSO

This week, Climate Decoded sat down with Kristina Wyatt, our Deputy General Counsel & Chief Sustainability Officer, for an interview to discuss her new role, challenges and opportunities organizations are facing regarding sustainability, SEC preparation, scope 3, and much more.

Q. Persefoni just appointed you to the title of Deputy General Counsel & Chief Sustainability Officer. Congratulations! What does it mean to you to be in this role at this point in time?

A. Thank you. I’m thrilled to be in this role here at Persefoni. We’re at an inflection point in sustainability. We’ve seen significant movement toward the convergence of climate regulatory requirements and standards around the world in the last year, and that isn’t going to change. We’re also building the technology that will enable companies and investors to comply with regulatory requirements and incorporate sustainability into their financial planning. I’m convinced that organizations that do this well will prosper. It’s exciting to be able to be a part of that.

Q. It’s interesting that you have both a legal and sustainability role. What does that mean in practice?

A. I believe the CSO needs to be a connector across an organization – tying together sustainability, legal, finance, operations, and strategic planning. The first thing is legal compliance. You have to get that right. But the CSO also has an opportunity to impact company policy and drive real value. At Persefoni, since we’re a climate-focused organization, that’s really exciting because it puts my team at the core of company strategy – thinking about how emerging regulations impact our product and our customers, and how to help our customers gain financial advantage through their decarbonization strategies.

Q. You are on the road often, speaking with sustainability-minded CSOs, CFOs, GCs, and corporate directors across industries. What is one common challenge you hear and one opportunity?

A. The common challenge I hear is around compliance. The emerging regulatory and stakeholder pressure to report – particularly on climate change – is definitely a challenge. The opportunity I hear often is in the opportunity for companies to create value through their decarbonization strategies. Companies that have calculated their footprints are now starting to consider how to reduce risk and create new opportunities by addressing their carbon footprints.

Q. Before your time at Persefoni, you were at the U.S. Securities and Exchange Commission (SEC). Can you tell us two things that CSOs, CFOs or other sustainability leaders need to be doing now to prepare for the rule's finalization?

A. First, I would advise companies to be ready to report their carbon footprints. I expect that at least scopes 1 and 2 emissions data will be required and, possibly, scope 3. Ensuring your data is ready for reporting is critical. The second thing is to work across your company to think through the risks and opportunities that are associated with your carbon footprint and decarbonization plans. This cross-functional collaboration is part of good governance, which is the starting point for the SEC proposal.

Q. There's a lot of talk about scope 3 being potentially left out of the requirements. Does this cause you concern?

A. Scope 3 emissions are the largest part of many companies’ emissions footprints. It is important that companies and investors understand the risks and opportunities associated with scope 3 emissions. In that regard, it would be a missed opportunity if the rules didn’t include scope 3. On the other hand, there is an inevitability to reporting on scope 3 emissions. Drivers such as reporting requirements out of Europe, countries that embrace the ISSB standards in their rules, and pressure from investors will all push companies to report their scope 3 emissions. Certainly, the SEC rules are an important forcing mechanism and will accelerate scope 3 reporting, but if the rules don’t include scope 3, the issue won’t go away.

Q. How important, really, do you think it is for businesses to start proactively preparing for the SEC rules and other climate disclosure regulations and standards? What is the worst that could happen if they just wait and see what happens?

A. Companies should be using this time to get ready – to develop the systems, controls, and procedures to ensure accurate climate reporting. They should use this time to find the right software to enable them to comply with the rules. Scrambling at the last minute generally is not a good strategy and can lead to inaccurate reporting, which carries litigation risk and reputational risk. Better to start early and have confidence in your reporting.

Q. There tend to be a number of road bumps in the transition to the low carbon economy, what is your message to sustainability-focused professionals as they continue to work towards this future?

A. Climate change is hard. No doubt about it. We don’t have all the answers. My advice is to be persistent and look for ways to innovate. Huge swaths of money are flowing toward the transition to a low-carbon economy, including through the Inflation Reduction Act and through private capital, which will help cultivate good ideas. This is a great opportunity for innovation.

Climate & ESG News Roundup

Intergovernmental Panel on Climate Change warns of Earth nearing a critical threshold

Yesterday, the Intergovernmental Panel on Climate Change (IPCC) released its Sixth Assessment Synthesis Report, warning the world that urgent decarbonization is needed to “secure a liveable sustainable future for all.” The report states that global emissions will need to be cut by almost half by 2030 if global warming is to be limited to 1.5°C above pre-industrial levels. This 1.5°C goal is the basis of The Paris Agreement, in which the global community gathered to commit to setting ambitious climate targets to limit warming. With current policies and emissions levels, Earth is on track to reach this 1.5°C threshold in the mid-2030s. If we are unable to cut emissions in half, and emissions pass the Paris Agreement’s target, every percentage of a degree the temperature rises will increase the severity of climate change effects.

We must critically prioritize climate justice in the pursuit of a 1.5°C world, as the IPCC states that those who have contributed the least to climate change are being disproportionately affected. “In the last decade, deaths from floods, droughts, and storms were 15 times higher in highly vulnerable regions,” said Aditi Mukherji, one of the IPCC report’s authors.

While this is chilling news, the IPCC emphasizes the fact that there is still time to course-correct. In addition to cutting emissions in half by the end of the decade, the report underscores the need to prioritize climate-resilient development, including investment in clean energy and low-carbon electrification, as well as improved access to walking, cycling, and public transportation. Governments and companies need to invest 3-6x more than they currently are annually to hold warming at 1.5-2°C. “Accelerated climate action will only come about if there is a many-fold increase in finance. Insufficient and misaligned finance is holding back progress,” said Christopher Trisos, another of the IPCC report’s authors.

Canada releases new financial institution climate disclosure rules, including scope 3

On March 7, the Canadian Office of the Superintendent of Financial Institutions released Guideline B-15: Climate Risk Management, which will govern the financial sector’s management & disclosure of climate-related risk, including scopes 1, 2, and 3 emissions. While the rule itself only applies to financial institutions, its effect will be substantial and far-reaching. The scope 3 emissions disclosure mandate means that Canadian financial institutions will be required to report on the emissions of the companies they lend to or insure (also known as financed emissions). Therefore, companies throughout the world doing business with Canadian financial institutions should expect requests for emissions data in the coming years.

Under this new standard, the largest banks and insurers will start reporting on their climate-related governance, strategy, risk management, and metrics for fiscal year 2024.  Smaller banks and insurance companies will start one year later, covering fiscal year 2025. Scope 3 emissions disclosure requirements will be effective one year after the starting point for the other disclosures.

Canada’s announcement builds on global momentum to regulate climate risk within the banking sector, including in the US, where the Federal Reserve has announced that the nation’s six largest banks will be participating in a pilot climate scenario analysis. See here for more coverage of Canada’s new rule.

41% of companies reporting at least one scope 3 category, reports CDP

Recent reports paint the picture of the current climate disclosure landscape. Of the over 18,000 companies reporting to CDP, only 41% are disclosing at least one scope 3 category, according to their latest Global Supply Chain Report. This is concerning, as scope 3 emissions are, on average, 11.4 times higher than operational (scope 1 and 2) emissions.

While we are making progress, there is significant room for improvement. Business travel (category 6) is currently the most reported-on scope 3 category, with 42% of scope 3 reporting companies providing disclosure, despite business travel being a low-impact source of emissions. Purchased goods and services (category 1) is the second largest reported category at 35%, however, 39% of reporters across industries indicated that the category was not relevant to them. CDP is calling these industries’ bluffs on this, saying that purchased goods and services are indeed a major emissions source for nearly all industries.

A recent report published by Financial Executives International (FEI) and Persefoni surveyed over 50 chief accounting officers and controllers, finding that:

• 77% reported difficulties in securing scope 3 data
• 58% state the complexity of climate data is an obstacle in preparing for climate reporting associated with the SEC’s climate disclosure proposal.

Still, only 2% of companies are taking the “wait and see” approach by choosing not to prepare for SEC rules, according to a PWC and Workiva survey. 70% of companies surveyed will proceed despite the timing of the final SEC rules, and 28% are considering it.

Events You Can't Miss

• Finance professionals can tune into the ESG Updates Conference, hosted by the FEI, on March 29-30 for best practices, case studies, and cutting-edge solutions straight from leaders of their field. Catch our own Chief Decarbonization Officer, Mike Wallace, moderate a session on ESG reporting software. Participants can register online.
• Lawyers seeking to learn more about the role they play in managing ESG commitments and requirements can tune into the Corporate Counsel Symposium of 2023, hosted by the New York City Bar Association on March 31. Persefoni’s Kristina Wyatt will be featured as a keynote speaker. Registration is open online.
• Registration is now open until April 14 for Science, Technology, and Innovation (STI) stakeholders wishing to participate in the 8th annual Multi-Stakeholder Forum on STI for the Sustainable Development Goals, taking place in New York on May 3-4. Anyone else who wishes to observe the forum can access the live webcast on demand through UN Web TV.