SEC Climate Disclosure Requirements

SEC Climate Disclosure Requirements Heating Up,
How to Take Action

June 1, 2022 (Wednesday)
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Contents
Table of Contents
Presenters ......................................................................................................................................................3
Presentation .............................................................................................................................................. 4-15
Question and Answer ................................................................................................................................. 6-18
Presenters
Andrew Salbarrey [Moderator]
Regional New Business Sales
Leader
S&P Global Market Intelligence
Esther Whieldon
Senior Writer, ESG Thought
Leadership
S&P Global Sustainable1
Grace Kao
Head of Analytics (Corporates)
S&P Global Sustainable1
Presentation
Andrew Salbarrey
Good morning, everyone, and welcome to today's webinar. My name is Andrew Salbarrey. As part of S&P Global Market
Intelligence, I lead the team that assists companies to meet their ESG disclosure requirements, plan and report on their
ESG journeys. I'll be moderating today's webinar titled, SEC Climate Disclosure Rules Heating Up: How To Take Action,
and have invited two industry experts that will talk us through today's topic.
So we've been blown away -- we can go to the next slide. We've been blown away by the interest in this topic, and I want
to thank everyone for committing your valuable time with us today.
We want this to be an interactive session, so feel free to submit any questions through the presentation using our Q&A
widget, which you should see on your screen. We will address them during the Q&A session at the end of today's call.
Additionally, the PDF for this webinar will be found in the related content widget within about 24 hours, probably sooner.
In the same widget, you'll find additional resources, insights, commentaries published by us. And lastly, at the conclusion
of the webinar, please take the time to fill out a short survey. Your opinion and insights matter to us. Next slide, please.
So I'd love to take the time now to introduce my colleagues. Let me start with Esther Whieldon, who is a Senior Writer at
S&P Global Sustainable1 Thought Leadership Team and co-host of the widely popular S&P Global podcast, ESG Insider,
which average, I believe, about 7,000 listens per week. I'll include a link to the podcast at the end of the webcast and
encourage everyone to take a listen. Esther has worked at S&P Global for 14 years where she has wri tten on topics
related to climate change, ESG and energy issues.
I'd also like to take the time to introduce Grace Kao, Head of Analytics at Sustainable1 Corporates segment. Within the
Corporates segment, Grace oversees and leads the development of S&P's c limate analytics products, which include
TCFD reporting, and other aspects such as scenario analysis, Scope 1, 2, 3 emissions calculations and disclosures,
setting up science-based targets. My team and I, in collaboration with Grace's team, have been fortunate enough to help
some of the most progressive and conscious companies in the world embark on their ESG journeys.
We always love hearing how you're approaching your own ESG journey and would love to welcome the opportunity to
speak after the webinar. Thank you, Esther and Grace, for joining us today. So let me go into the agenda.
Over the next 60 minutes, we're going to be discussing the U.S. Securities and Exchange Commission's recently
proposed climate requirements for the collection, measurement and disclosure of emissions data. Our goal for this
session is that you will walk away with a better understanding of the proposed regulation and what it means for
companies, key actions companies can consider when considering the proposed regulation into business strategies,
common challenges companies face when quantifying Scope 1 through 3 emissions and the types of data companies
need to capture.
Lastly, we'll wrap up today's session with a Q&A session, where you'll be able to have the opportunity to ask questions
directly to Esther and Grace and leverage their expertise. On that note, let's first begin by answering a poll question, which
should be popping up on your screen and you should be able to choose. So let's see. For some reason, I can't see the
poll question. Oops, sorry.
Esther Whieldon
I can see them and read them if you want. I can help.
Andrew Salbarrey
Yes. If you wouldn't mind. For some reason, it is not showing up on my screen.
Esther Whieldon
Okay. So the question is, what is the biggest driver behind the SEC's climate disclosure rule? A, inconsistent voluntary
reporting; b, shareholder pressure from big asset managers; or c, following the lead of the EU.
Andrew Salbarrey
Thank you, Esther.
Esther Whieldon
And can you see the answers?
Andrew Salbarrey
First one is cut off for some reason.
Esther Whieldon
You may need to adjust the size of your Zoom for your Google.
Andrew Salbarrey
How do we do that? Sorry, I'm technologically challenged today. Esther, if you wouldn't mind just taking t he...
Esther Whieldon
Sure. So it looks like 48.9% said inconsistent reporting, 40% said shareholder pressure and 10% said following the lead of
the EU. So it seems like the first two were sort of the biggest -- had the biggest people -- most people behind that idea.
Andrew Salbarrey
Thank you, Esther. With that, we'll lead into our first discussion. Esther, if you wouldn't mind just taking it away.
Esther Whieldon
Sure. So let's go ahead to the next slide. So I think before we get going about the rulemaking itself, it's important to put in
context what is sort of driving this rule. And the underlying movement behind it is really the sustainability movement or the
ESG trend or movement, however you want to call it.
And ESG stands for environmental, social and governance. And it's really sort of the way by which companies and
investors think about how to plan for and adapt to and also take advantage of opportunities related to changing social
norms and expectations as well as changing knowledge about climate and environmental risks. So as the science
changes, as we learn more about environmental impacts and as regulations around those change, what are those
environmental risks and opportunities?
The idea of ESG has been around for a long time. But increasingly, we're learning that ESG issues are interrelated. You
can't address climate change without also thinking about a just transition and environmental justice, right? You don't want
to be causing more problems for communities, for the health of the areas you do business in as you're trying to improve,
reduce global warming. So those are all sort of important things to think about along with each other. And really, this used
to be sort of a fringe concept, but it's really becoming something that's relevant to all industries. All right, next slide.
So the rule itself. So what's driving the rule? I agree with the first two, that what's driving it is really as companies are
becoming more interested in knowing these risks, the environmental risks, ahead of the climate risks, they're trying to
understand, how do I -- how are my risks aligned with others' in my own sector, right? But also, we have major asset
managers and financial institutions like banks who really, they depend on the information from the companies they lend
money to and the companies they invest in. They depend on that information from those companies to understand their
own risks, for these asset managers and financial institutions to understand their own risks.
And what's happening, I attended -- 2 weeks ago, Sustainable1 held a conference in New York City, and there was a lady
f rom an asset manager who was saying, even year-to-year, the climate reports to the Climate Disclosure Project the
companies do, the numbers might not match up. She joked there's an intern putting those numbers in f or some of them.
So Obviously, there's a big problem with the data both being consistent across sectors but even within companies. And I
have experienced that as well in some of my data journalism practices with those numbers in the past.
So the SEC decided that the voluntary practices that are happening aren't -- just are not doing enough. Not enough
companies are doing it while larger ones or the smaller ones really aren't as much. And the numbers are really just not
allowing an apples-to-apples comparison. So they proposed this rule on March 12, and they recently extended the
comment deadline to June 17, so just a couple of weeks away from now.
The proposal notably draws on the recommendations of the Task Force on Climate-related Financial Disclosures or
TCFD. So this framework was created -- I'm going to forget the year. I think it was 2018 or 2019. And for the first time
really, it was a f ramework that asked companies to not only talk about their governance practices and their plans and their
own risks, they asked companies -- it recommended companies think about how their climate risks would play out under
dif ferent scenarios. So it was the first time really that companies were being asked to do a scenario analysis risk. And that
is part of what the SEC is wanting to understand here from companies.
The rule also is modeled when it comes to the emissions side -- and I think Grace is going to talk more about this, but it
draws on the GHG protocols, corporate accounting and reporting standard, which is pretty widely adopted, I've heard.
I recently wrote an article for Sustainable1 or a piece in which we use the Corporate Sustainability Assessment
inf ormation, the CSA. And a quick couple of details about the CSA for those who aren't familiar with it. It's a -- it covers 61
industries, more than 7,500 companies, and includes more than 13.4 million data points collected on just about everything
you can imagine for ESG issues. So it's a really great resource for understanding where companies stand on ESG and
institutions' stand on ESG issues.
And we were wondering, well, the SEC is going to require TCFD alignment. How many companies actually already align
with the TCFD recommendations? And as you can see here, in the United St ates and more broadly, it's actually a
relatively small amount. It's around 30% already aligned with the TCFD recommendations, which is interesting because
the TCFD is of ten putting out notes about how much support it gets, but there is a difference between somebody saying, I
support your recommendations, I'm backing them and actually implementing them. Next slide, please.
So I think of the SEC rule as sort of 2 groups of focuses. One is material risk -- material climate risks for governance and
targets. When we talk about material risk -- now I am not going to try to define materiality because that is actually a legal
f ight that's probably going to happen around this rule when it's finalized. But generally, the SEC's broader authority to
require corporate financial disclosures falls under this concept of materiality.
So as Andrew mentioned, I'm co-hosting the podcast, ESG Insider. And for a recent episode on the SEC's climate
disclosure rule, I talked with the SEC lawyer about how Supreme Court precedence st ates that if there is a substantial
likelihood that a reasonable investor, given the total mix of information before that investor, if that investor would deem a
particular event or item of information to be important for them to know for their investment or voting decision, then that
should be considered material and should be something a company discloses. And so that's the concept underlying
materiality.
But f or the purposes of this rule, the SEC wants a company to disclose climate-related risks that are "reasonably likely to
have a material impact on a company's business, results of operations or financial condition." So it wants to give investors
an idea of how climate change could actually or is already actually affecting a company's bottom line and future plans.
It also wants -- f or companies that have already set targets, and there are a good number of companies that have
announced certain climate targets, the SEC is saying if you have set a target, you need to talk about how you're going to
get there, any interim goals, as well as the extent to which you are going to rely on something, RECs, renewable energy
credits, or carbon offsets, because this is a big area where there's sort of a -- it's sort of an unknown area. We know a lot
of companies especially those that can't get rid of emissions on their own. Like industrial emissions are going to be hard to
reduce. And the SEC wants to help investors understand the extent to which companies are going to have to change their
own activities versus may rely on the activities outside of them, such as tree planting, direct air capture, carbon capture
and sequestration, things like that.
And then also, the SEC is going to require certain climate-related financial statement metrics and related disclosures. And
this is where companies are going to have to actually break down specifically in line items in those financial statements
how climate change is causing costs for adaptation, climate impacts. Like if a hurricane hits a utility system, how much did
that cost in damage to the utility's infrastructure, repair and all that stuff. So the SEC also wants companies to start
actually reporting how climate range is already affecting them in addition to how it's projected to affect them. Next slide,
please.
So there's really two 2 types of climate risks. One is transitional risk. And that involves like what the world -- what would
happen if the world collectively -- so it's governments, the public, companies. What would happen if they decided to
collectively pursue a transition to a low-carbon future and under different scenarios? So for example, a 1.5-degree
scenario would require a very, very fast moving, massive increase in investments. Possibly, a carbon -- a price on carbon
would be much higher than it is currently, all kinds of things. Customer demands would change, all of that. And so what --
how would that affect a company's risks going forward is what you have to consider when you're thinking of transitional
risks.
And then there's the physical risks. And that involves how climate change impacts your assets, your supply chains, your
operations and things like sea level rise, wildfire, heat waves and flooding and even slower-changing problems like the
ability of nature to balance itself out, right? We're losing pollinators. We'll be -- lose the ability to have certain agricultural
crops. So there's a lot of different types of things to think about with climate change.
This map here on the lef t, this is an article S&P Global Market Intelligence did with Sustainable1 last year looking at -- I
think it's 13. I haven't counted. But it's more than 10 of the biggest counties in the U.S. by population and looking at 7
dif ferent climate-related risks.
And you can see, for example, that hurricane risks in Miami, Florida are big, right, as well as sea level rise, while water
stress is a bigger problem in the West, right, or wildfire is a bigger problem in the West. And so it's important to
understand where you operate, where you have assets, to understand the specific risks to those areas. Okay, next slide,
please.
The rule -- so this is the second component. So the first one is talking about material risks. And emissions are a material
risk. This is more about a specific metric that the SEC wants disclosed. So the rule would require disclosure of Scope 1
direct emissions and Scope 2 indirect emissions related to energy usage, and Grace will go in more detail about that.
The companies would have to include attestation reports for accelerated filers. And large companies would also have to
provide Scope 3 emissions information but only under two circumstances: one, if Scope 3 emissions are material to that
company, or if the company has already set a target that involves Scope 3 emissions, yes. If you've set a target, y ou need
to explain where you're at, right?
Scope 3 disclosures, what's different here is they'd be phased in over time and they'd include a safe harbor so companies
would not be sued if the data ended up not being quite accurate because it is quite hard to measure and track. And then
also, smaller companies would not have to do this and then maybe I don't think at all in the rule.
If you look here on the left, again turning to the CSA data from my article, you can see that of the companies that are
already disclosing Scope 1 and 2 emissions, Scope 3 is actually something many of them are doing. So it seems like
when companies start disclosing emissions, they often start including Scope 3 already. Next slide, please.
Now what also is driving this is many large companies have set net zero targets, especially in energy and apparently the
North American and European banks area. And you can see this is a -- December 2021, Market Intelligence did an article
on this. And what this means is you can set a net zero target. Net zero means I'm planning to achieve net zero emissions,
not absolute emissions but net zero emissions, by 2050 or earlier. And this aligns with the concept of a 1.5-degree
scenario.
And what's happening is many companies that have set zero targets will say, we know how to get 80% of the way there,
but we're waiting on emerging technologies, we're waiting on carbon pricing, we're waiting on offsets and all kinds of
things to get that last 20%. And so there are some big questions about how companies t hat have set net zero targets are
actually going to reach them. And I think the SEC is trying to help address that sort of gap and knowledge. Next slide,
please.
But although we have a lot of companies, big ones, setting net zero targets, when we look at t he broader universe of
companies looked by the CSA -- so here's 17,000 -- almost 17,500 companies looked at for this data point. When it
comes to actual disclosures of Scope 1 and 2 emissions, while some sectors have 50% or more, many of them are
between 10% and 20%, maybe up to 30% disclosure currently. And so we still have a long way to go on -- I think what this
implies is that larger companies are starting to disclose emissions, but many of the smaller ones may not be. And that is
probably part of why -- part of how to interpret this chart. Okay, next slide, please.
So just some initial steps that we can take now. Although the rule is pending, and I don't want to predict what the SEC is
going to do in the end, based on the history of how the SEC has been in the past, they might tweak some around the
edges. But chances are this rule is going to go forward.
And so think about what aspects of the proposed rule, as it's currently proposed, would require you to scale up or create
new practices. You -- within that, think about what processes and methodologies do we need to create to make sure we
can report the information in the time lines that the SEC is envisioning annually and otherwise.
And then the Market Intelligence platform and the company abroad of S&P Global has just -- I'm always in awe. I always
think, "Oh, we can't possibly have that data point," and then I f ind that we have it in like three different forms. So our
company has a ton of information out there both in reporting by the Market Intelligence reporters as well as data from
Trucost f or the CSA and other places on the Cap IQ platform that allows you to compare yourself to peers, to look at
stories about emerging technologies and all kinds of things. So just really, this is a good opportunity to use this resource
as a -- to leverage it for your planning. And with that, Andrew, I'm going to turn it back to you.
Andrew Salbarrey
Excellent, Esther. Thank you so much for your time. Okay, great. So let's move on. We'll -- please save your questions for
the end.
Let's move on to -- we have two poll questions. So -- f irst of which, and now I can see the poll question, which is great,
have you incorporated scope GHG emissions into your current ESG reporting framework? A, yes, we have measured our
Scope 1 and 2 emissions footprint only; b, yes, we have measured our Scope 1 through 3 emissions footprint; c, no, we
have not measured our GHG emissions footprint. So please take the time to answer that question. We'll give it another
minute.
Here we go. So 46.6% of everyone on the line, yes, we have measured Scope 1 through 2, 1 and 2 emissions footprint
only with plans to measure Scope 3 in the future; followed by 30%, yes, we have measured our scopes 1 through 3
emission footprint. Fascinating details.
One more poll question before we move on to our next speaker, Grace Kao. What are the key challenges when
calculating your GHG emissions? A, inconsistent collection methodologies across divisions; b, lack of knowledge of
dif ferent ESG frameworks and requirements; c, challenges tracking supply chain impact or product usage impact. Again,
please take a few moments to answer this question. We'll go through the answers here shortly.
All right. Wow, okay. Almost 60% of folks on the line, challenges tracking supply chain impact or product usage impact;
f ollowed by 26%, inconsistent collection methodologies across divisions. Thank you all for participating. Grace, I hope that
sets you up.
Grace Kao
Thanks, Andrew. Hi, everyone. So Esther did a great job summarizing what's going on inside the SEC proposed rules.
And here, I've just kind of done a high-level summary of kind of breaking down some of the required disclosures into
groups that kind of correspond with existing frameworks.
So there's the requirements to disclose climate-related risks as well as those impacts and the management of those risks.
And again, as Esther says, this draws primarily from the TCFD framework or the Task Force on Climate-related Financial
Disclosures. So within that framework, there are guidelines in terms of what metrics to disclose on, what to measure and
how to disclose on that.
Then there's the proposed requirements to disclose Scope 1 and 2 emissions as well as Scope 3 emissions if they're
material or if you have a target set on Scope 3. And this draws primarily on the Greenhouse Gas Protocol, and they
recommend calculations based on this protocol, which is a widely accepted protocol that I think most companies probably
turn to when they're calculating these emissions.
And f inally, there's a mention of targeting goals. And while it's not required for companies to set targets and set goals, if
you were interested in doing that, I would point you to the Science Based Targets initiative. Again, there's no requirements
f or goals necessarily to be science based, but there is more and more pressure growing on having companies set
science-based targets. So that's where I would turn to for that.
For today's presentation, I'm going to focus more on the Scope 1, 2 and 3 accounting. I saw almost half of y ou guys
disclose on all 3 or calculate all 3, but there is over 1/3 of you that might not account for any of this yet. So I'll go over this
in more detail today to kind of get you started on that process and hopefully align kind of methodologies and approaches
and share more about approaches for things like supply chain and Scope 3 as well.
So to get started, one way is to kind of break it down into these three like approaches, I guess. So you want to design a
process. So develop an inventory management plan and establish organizational boundaries.
Then you want to do the actual greenhouse gas accounting, obviously. So what you'll do here is you'll identify your
greenhouse gas emission sources, you'll collect activity data for those sources, and then you'll calculate your greenhouse
gas emissions.
And then f inally, over time, you'll want to actually have greenhouse gas emissions management plan in place. So that will
allow you to track emissions and trends over time. You can manage the inventory quality because, as you can imagine, if
you're f irst starting out in this, you're not always going to get the best quality data initially. But you can always improve on
that over time. And then eventually, you'll want to probably establish a reduction target with the way things are going.
And so again, for today's presentation, I'm going to just focus on the first two pieces of this to kind of get everyone start ed
on the same page when it comes to greenhouse gas accounting and how to satisfy the SEC proposed rules.
So as I mentioned, you might want to develop an inventory management plan. And this isn't necessarily mandatory, but it
will help you in your process to collect and calculate greenhouse gas emissions.
So an inventory management plan describes an organization's process for collecting high-quality, corporate-wide
greenhouse gas inventory. And an organization would use this inventory management plan to institutionalize a process for
collecting, calculating and maintaining greenhouse gas data.
So this was actually kind of put out by the EPA. And so they recommend seven sections of an IMP. The f irst is just your
basic organizational information to keep track of. So the name, address, especially if you have multiple locations, and then
inventory contact information. So sometimes, if you have different facilities, you might have different facility managers in
charge of those, and you might have a different contact for each of those.
Then you want to establish your boundary conditions. And I'll get into this more in the next slide, but this is really important
to understand basically what emission sources fall under what scopes, between scopes 1 and 2 and Scope 3.
Then you'll actually do the emissions quantification. So you'll need your quantification methodology and the emission
f actors. You'll have, hopefully, a data management plan. So your data sources, your collection process and the quality
assurance. And I think this data management plan will become more and more important, especially with kind of more
eyes on this data with the SEC proposal. And as Esther mentioned, many times, you might have kind of the summer
intern or the most junior analyst putting together this data, but you might want to think about elevating those positions as
kind of the scrutiny increases over this -- the data quality, right?
You'll obviously establish your base year. You'll want to have some management tools in place. So what are the roles and
responsibilities of the people who -- involved in the inventory? What are the required training and the file maintenance? So
Again, I think the management tools will become more and more important as there's more scrutiny on these numbers in
the f uture.
And f inally, there's the auditing and verification. And so this one will also -- this also plays a role in the current SEC
proposals, where auditing would -- and verification is basically going to be required over time. So this is going to be really
important as part of your overall inventory management plan.
So to kind of get more details into the establishing organizational boundaries, so organizational boundaries are high-level
boundaries that determine which business operations and facilities are part of the greenhouse gas inventory. Due to
dif ferences in legal and organizational structures, each company's organizational boundary will vary. So no two
companies will likely have the same boundaries, but this will help you kind of define them for your specific organization.
So the Greenhouse Gas Protocol basically recommends three different ways that you can kind of set your organizational
boundaries. The f irst is operational control, which is probably the most commonly used approach. And so under the
operational control approach, a company will account for 100% of the greenhouse gas emissions over which it has
operational control, meaning that if you have operational control over certain facilities or certain operations, you will
account for 100% of those emissions in your own Scope 1 and 2.
You will not account for greenhouse gas emissions from operations in which you own an interest but you don't have any
operational control. Actually, those emissions would technically fall under your Scope 3. So for Scope 3, you can think
about everything that you don't have operational control over but deals with your business operations.
The other option is financial control. So similar to operational control, a company will account for 100% of its greenhouse
gas emissions over which -- it has f inancial control over. And you would account for those emissions in your Scope 1 and
2. You would not account for greenhouse gas emissions from operations in which you would own an interest in but you
don't have financial control over. Again, those emissions where you don't have financial control over under this boundary
type would fall in your Scope 3.
And a company is defined to have operational control over the operation if the former has the ability to direct the financial
and operating policies of the latter with a view to gain economic benefits from its activities. A company is considered to
have f inancial control if it retains the majority of the risks and rewards of ownership of the operation's assets.
And then the last way is equity share. So under the equity share approach, a company accounts for the greenhouse gas
emissions from operations according to its share equity in the operation. So simply put, if you own 20% of an operation,
you would account for 20% of that operations emissions in your own emissions inventory.
So once you establish your organizational boundary, at a very simplistic level, you'll want to identify your sources. So your
Scope 1, 2 and 3 sources. Then you want to collect the activity data for that financial year. So activity data usually comes
in the f orm of kilowatt-hours of electricity, for example, gallons of fuel, cubic meters of maybe natural gas. But there's also
other activity data that you might not think of but that might be more readily available to you that you can use. So for
example, mileage driven. So if you have company-owned vehicles or if you have leased vehicles, for example, you might
not have the exact fuel usage, but you might have the total miles driven on those vehicles in a given year.
Alternatively, there's also spend-based approaches for many of the Scope 3 categories, for example, as well as ways to
use spend-based approach for your Scope 1 and 2 as well. So that's something we specialize here at Sustainable1, is
having emission factors that are able to convert your spend on certain activities into emissions.
Speaking of, you'll want to then apply your emission factors for the greenhouse gases. What I've laid out here are seven
greenhouse gases that I think the current SEC proposal is going to require disclosure on. So they want both disclosure at
the greenhouse gas level and in total in what we call carbon dioxide equivalent.
So very basic sample calculation. I'm sure most of you are f amiliar with this. But if you're tracking, let's say, natural gas for
your Scope 1, you'll have your activity data for the year. So let's say you use 5,000 cubic meters. You'll have an emission
f actor that you can apply to that, and a simple calculation will kind of get you your emissions.
I do want to say that emission factors are typically widely available. So the U.S. EPA has emission factors available. The
U.K. government, Australian government, a number of governments actually have now put out emission factors that you
can source and apply to your activity data.
Another example I want to point out is the Scope 3 example on, for example, purchased goods. So let's say you don't
know physical production or anything like that, but you do know how much you spent with a certain supplier or you do
know how much you spent in a certain category of purchased goods. So here at Trucost as Sustainable1, we're able to
apply an emission factor based on spend. So if you spend $2 million in a certain sector, there is an emission factor that --
based on spend that we can apply to then calculate the emissions for that. So that is kind of a high-level summary of how
the emissions and activity data would all come together.
And now I just want to quickly touch on the different scopes because I'm sure most of you guys are already familiar with
your -- the def inition of these. But I just want to make sure we're all on the same page because sometimes it can get a
little bit tricky to differentiate between Scope 1 and 2 versus 3 depending, again, on your organizational boundary.
So again, Scope 1 includes the direct emissions from sources which a company owns or controls. And this includes direct
emissions from fuel combustion and industrial processes. The Scope 2 emissions would be technically indirect emissions
related solely to the generation of purchase electricity, steam, heating and cooling that's consumed by the operations or
equipment owned or controlled by the company. And then finally, Scope 3, we would categorize as all other indirect
emissions from sources not owned or directly controlled by the organization but are related to the organization's activities.
Again, what falls under Scope 3 versus Scope 1 and 2 will depend on how you draw those initial boundaries.
And just to get a little bit deeper in Scope 1 sources because I don't think -- sometimes not everyone is aware of what it all
can encapsulate. I just want to kind of touch on the different direct emission sources.
So one type of source is stationary combustion. So emissions from combustions of fuels and stationary equipment such
as boilers, furnaces, heaters, incinerators, so on. And these emissions usually obviously result from the fuel you would put
in these equipment. So some of these might take natural gas, for example, or diesel or other types of fuels that are
combusted and release emissions.
Then there's mobile combustion. So mobile combustions are emissions from combustion of fuels in transportation devices
that are typically owned by the reporting organization. So many companies might have company -owned vehicles or
company airplanes, maybe buses or some other types of transportation. So the fuel used in those transportation devices
would count as mobile combustion and fall under your Scope 1. This is also relevant for any construction equipment that a
company might have if they own forklifts or like dump trucks or anything like that. So anything that's mobile and would
consume fuel, those emissions would be under your Scope 1.
Then lesser known emissions sources include fugitive emissions. So these are emissions from the intentional or
unintentional releases from refrigeration and air conditioning. And typically, fugitive emissions are associated with
ref rigerants. So the use of refrigerants, for example, in ref rigeration and air conditioning. And while the total quantity of
ref rigerants used in a given year might be a lot lower than your standard fuel sources, the actual global warming potential
of fugitive -- or of refrigerants is sometimes 1,000x that of typical carbon dioxide. So it is important to account for fugitive
emissions, especially from refrigerants, in your Scope 1 inventory.
And then f inally, there's process emissions, which are more specific to certain sectors. And these are emissions from
physical or chemical processes such as carbon from -- carbon dioxide from the calcination step in cement manufacturing
or carbon dioxide from the catalytic cracking in petroleum processing or PFCs in aluminum smelting. So process
emissions are typically relevant for only certain sectors where there might be carbon dioxide released from some sort of
step in the overall manufacturing process.
I'm not going to go into detail on this. You guys will have access to these slides afterwards. But this is just a table of how
everything comes together. So your sources for the different source types. So like boilers and furnaces for stationary
source types; you have company vehicles, construction equipment, for example, for mobile combustion; and then your
ref rigeration, air conditioning for fugitive emissions.
We've also listed out some common fuels you might encounter that you'll want to collect data on that have greenhouse
gases obviously associated with them when combusted or released and then the typical type of activity data.
So here, I just want to reemphasize, too, that you would typically want to collect the physical quantity of these fuels. So
like liters, gallons, cubic meters, so on and so forth. But when that's not available, there are other data points that are
maybe more accessible and also can be converted into emissions. So energy units is an obvious one; kilowatt-hour, you
might use that for electricity, but sometimes natural gas is also measured in energy units. But the cost of fuels, as I
mentioned before. So maybe you don't have the physical quantity of fuels, but you know how much you paid. There are
ways to convert the cost and the spend on fuels into emissions as well. For mobile combustion, again the distance travel
might be something you do collect, and you can convert that into emissions.
And typical collection methods, many times companies might look to their utilities companies because obviously they're
tracking the amount of natural gas or electricity one might consume. So you might look to your utility bills for that or
invoices. You might have on-site metering that your facilities managers track themselves. So that's another really good
way to track -- to collect this data. With vehicles, you have your -- the gauges within those vehicles, you have your
purchase records of fuel, so on and so forth. So these are the ways that typically companies will track or collect this data,
but you'll want a really good data management plan in place to kind of track it over time and collect it and have it all in one
place.
Scope 2 emission sources are a little bit more straightforward because they are, again, related to the generation of
purchased or acquired electricity or purchased heat, steam or cooling. And these are considered indirect emission
sources because they're the consequences of activities that basically occur outside of the operations. So when you
purchase electricity, fuel is combusted off-site usually at the electric utilities company. So there are emissions associated
with that. So those emissions are counted in your Scope 2 inventory.
And then one thing I want to quickly highlight is that there's 2 ways to account for Scope 2 emissions. One is a market-
based approach, and one is a location-based approach. So for the market-based approach, this -- the greenhouse gas
emissions are associated with the specific choices a consumer might make regarding its electricity supplier. So you might
contract for a specific generation mix, for example. And you might have supplier-specific emission factors that you might
use. You might also utilize renewable energy credits, RECs, or power purchase agreements.
Then there's location based. So location based just uses an average emissions factor based on the electricity grid where
the operation is located. And the location-based approach considers average emissions intensities, again, in that specific
location. And currently, the Greenhouse Gas Protocol, including CDP, requires the disclosure of kind of both types of use,
both market-based calculation and the location based.
Again, this is a similar summary slide for Scope 1 where we talk about potential sources of your Scope 2 emissions and
then the activity data you would collect as well as where you might collect that information.
And then f inally, I want to touch on Scope 3 because I know many of you -- most of you probably haven't quantified or
thought about your Scope 3 yet. So I just want to give a hig h-level breakdown of what Scope 3 emissions are or how you
can view them and start thinking about them.
So Scope 3 emissions are broken out into 15 different categories. And those 15 categories are broken up into upstream
emissions and downstream Scope 3 emissions. So the upstream Scope 3 emissions, one way you think about them are
emissions more associated with things that you might buy or purchase such as simply purchased goods and services or
capital goods. There's also fuel- and energy-related activities. So beyond accounting for f uel in your Scope 1 and 2,
there's also what's called well-to-tank or transmission and distribution losses that you want to account for in Scope 3.
Then there's transportation and distribution upstream. So this might be third-party providers of transportation and
distribution. So think like your FedEx or UPS, that you pay them to deliver your goods, let's say.
You also have waste generated in operations. So emissions associated with the disposal of the waste that you generate.
If it goes to landfill, it'll have emissions associated with that. If it gets incinerated, there'll be different emissions associated
with that.
Then business travel is probably the one that most of you recognize. So if you take an airplane or a train somewhere, that
would count in your upstream Scope 3. There's employee commuting, which looks at the emissions associated with all
your employees commuting to work, whether by car or train or bus, whatever their mode of transportation is. And then
upstream leased assets, which in this case is, again, assets you're paying for. So you're leasing from somebody else.
Then switching over to the downstream side, a way to look at downstream are emissions associated with things that you
get paid for. So for example, if we go back to the leased assets example, these are -- this would contain emissions from
assets that you lease out to someone else. So someone pays you to lease your assets.
You also have the processing of sold products and the use of sold products. So once you sell your products, does it get
f urther processed? And are there emissions associated with that? Is there emissions associated with using your
products? Like do you have to plug it in? Do you need to put fuel on it like in an automobile, for example? As well as end-
of -life treatment of that product. So once it reaches end of life, how do you dispose of it? And are there emissions
associated with that?
The two other big ones here, well, franchises, which really isn't relevant to most companies, I would say, but if you do
operate a number of franchises, for example, if you're a McDonald's or a Starbucks, those emissions with each of those
individual franchises would fall here.
And then f inally, investments. So investments is a big one right now. As you can imagine, most asset managers,
institutional investors, pension funds, they will want to quantify their emissions associated with their investments under
this category 15.
So that's kind of an overview of the Scope 3 emissions categories and kind of where you can get started and how you can
think about breaking down your Scope 3 and collecting data for these different categories.
And I wanted to end on kind of bringing it all together in relation back to the SEC proposal. So just real quick again, you
guys will have access to this, but Scope 1 and 2, who must report? Basically all companies that Esther mentioned earlier;
whereas Scope 3, the smaller reporting companies don't have to do this. And you only also have to report Scope 3 if it's
material and if you have set a Scope 3 emissions target.
For what you have to disclose when it comes to admissions, you need to disclose both aggregate total metric tons of
CO2e and then a breakdown by those constituent greenhouse gases that I showed you earlier. There's about seven of
them. For Scope 3, it's the same, plus any breakdown by specific categories. As I showed you on the previous slide, if you
have one category that has significant emissions associated with that, they recommend you to kind of break that out.
And you'll also want to report a greenhouse gas intensity. So what's the total tons of greenhouse gases per unit of
revenue, f or example, and then per unit of production that's relevant to your industry? You'll want to describe the
methodology.
The time period is an interesting one. You'll want to cover the same financial years that you typically cover in your
f inancial filings, but they do understand that like you might be doing this for the first time and you'll want to kind of
eventually align. So if you have 3 years of financial disclosures, you'll want 3 years of emissions. But they give you time to
kind of catch up.
And then f inally, the attestation requirements. So this will be required for Scope 1 and 2. I mean it's currently not proposed
to be required for Scope 3. So that brings me to the end of my part of the presentation. I think we can probably get into
Q&A now. Oh, we got one more?
Andrew Salbarrey
Thanks a lot. Grace, you're getting ahead of yourself, but great overview. Thank you. We covered a lot. We're about to
head into the Q&A session. But before we do that, because we covered a lot of information, if you would like to learn a
little bit more about S&P's offerings as well as maybe coordinate a call with one of our industry experts, please click one of
these -- please read the question below and decide whether or not you'd like to be contacted by us as well.
Question and Answer
Andrew Salbarrey
All right. So we're going to get into the Q&A session here shortly. I'm going through some of the questions that you guys
have provided. Let's start with a question provided by Mr. Richardson. "What makes a company large versus small for
scope emissions disclosure requirements?" And another question that we had, "If a company divests a subsidiary, does
the company retroactively remove that subsidiary's emission from its reportings or simply remove once divested?" Esther,
would you like to take the lead on that double-sided question?
Esther Whieldon
Sure. So if you want to read the answers for yourself, look at Page 43 and 48 of the SEC rulemaking in the footnotes. But
f or -- basically, the SEC defines, and I'm going to quote from here so I don't get it wrong, a small reporting company as a
"issuer that is not an investment company and asset-backed issuer or a majority-owned subsidiary of a parent that is not a
small reporting company and that either one had a -- and that, one, had a public float of less than 250 million; or, two, had
annual revenues of less than $100 million and either, I, no public float or, two, a public float of less than 700 million." I
hope that is clarifying that.
An accelerated filer versus a large accelerated filer. An accelerated filer is someone with -- has aggregate, well, market
value of the voting and nonvoting common equity held by its non-affiliates of $750 million or more but less than $700
million as of the last business day of the issuer's most recently completed second fiscal quarter as well as some other
things. And then a large accelerated filer, it looks like it's -- well, hopefully, that'll give its -- I think it's $700 million or more
is the only number I see in there. So I guess it's -- accelerated filer versus large is someone $700 or more versus 700 --
$75 million to $700 million. Hope that helps.
As f ar as what to do if you divest, I think Grace sort of answered that. But from what I can tell in the rulemaking, it does
f ollow sort of how you normally report things. And I see a question on Page 186 of the propos ed rule, where the SEC asks
whether they should require the calculation of a registrant's Scope 1, 2 and/or 3 emissions to be as of the end of fiscal
year, as proposed, or allow them to do it by different time lines. So there's a possibility that could change a little bit
depending on if you divest from somebody before the end of the fiscal year or not.
Grace Kao
And -- yes. And I can just add to that, Esther, too. I think typically, with greenhouse gas accounting, you want it to align
with your f inancial accounting. So if your financial accounting at the end of the year does not include the divested
operations, let's say, and you won't want to include that in your greenhouse gas emissions accounting either. So that's just
one thing to keep in mind, too, is however you report your financial statements, for example, you want to align your
greenhouse gas accounting with that.
Andrew Salbarrey
Thanks, Grace. How prepared are clients to satisfy the SEC climate disclosures? Grace, do you want to tackle that one?
Grace Kao
Sure. Well, as you saw when we did that poll, that I think over half the attendees here have at least calculated their Scope
1 and 2, if not their Scope 3 as well. So I think when it comes to the emissions accounting, companies have been thinking
about this for a while now. And so I think this is just kind of the push to get them to align a bit in terms of their account ing
approaches.
I think what's trickier is some of the climate-related risks, for example. So relating back to transition and physical risk,
there are ways to measure this. For example, we have ways to measure physical risk here at Sustainable1. We also look
at transition risks related to carbon pricing. But I think that's the area where companies haven't thought or done as much
yet. So I would kind of look out in that space. Whereas, I think with the Scope 1, 2 and 3 accounting, especially with
Scope 1 and 2, many companies are kind of well on their way and prepared for that. And then Scope 3 is kind of like the
next big horizon for that. But I think, as we saw, a lot of people are prepared in that space as well.
Esther Whieldon
Hey, Andrew, I saw a question come in about foreign issuers. I'd be willing to sort of take on that if you want.
Andrew Salbarrey
Yes, I would love that, Esther, if you wouldn't mind tackling that.
Esther Whieldon
So I think f oreign issuers, it applies to you regardless as long as you're a registered entity.
Andrew Salbarrey
So one second, Esther. Is the -- I'm assuming it's the question, "Are there any exceptions for foreign private issuers that
f ile under 40-F and 6-Ks? Or does the small/large company criteria apply to FPIs as well?"
Esther Whieldon
I probably shouldn't have done -- I didn't see the private thing. I thought they were talking about foreign in general.
Because I do know the SEC has a question out there in the proposed rule about whether it would allow international
standards like IFRS or other things for disclosure to count towards the SEC's disclosure. But I think it's a little different
than f or private companies. I'm not sure what the situation is there.
Andrew Salbarrey
Thank you, Esther. Here's another one for Grace. "How does Sustainable1 update its spend-based emission factors?
Example, do you account for inflation, actual changes in its emissions related to specific activities?
Grace Kao
Sure, yes. So we actually adjust our inflation factors every year -- sorry, not inflation, our emission factors every year
based on inflation. So for example, because it's spend based, right, we're assuming a certain -- $1 million will buy you a
certain level of activity. However, if there's inflation, then that $1 million might buy you less of that activity. So you might be
spending more to get the same amount. So that doesn't mean your emission should go up due to inflation. So we adjust
f or that every year. We look at the consumer price index and things like that and take that into consideration. We look at
specific sector-level changes to prices as well and adjust our emission factors based on that.
Andrew Salbarrey
Excellent. Thanks, Grace. Esther, here's a question for you. "How do you anticipate any regulatory changes as a result of
the upcoming elections impacting ESG investing strategies moving forward?"
Esther Whieldon
So what I'll say is, first of all, I would never ever predict what someone's investment strategy is going to be because things
change. I mean we have the Russia-Ukraine conflict, right, that has changed investment strategies. So you couldn't have
predicted. So I won't do that. But I will say that what I have noticed is that a lot of investment strategies out there that are
being made are being made on longer-term trajectories than short-term politics. And so I think they're being made on
assumptions of what will happen once the world realizes it's behind on tackling climate change and the momentum that's
already sort of started happening.
So if you're talking about investment strategies from the asset manager side, we already see a movement of them working
towards offering low-carbon options to their clients, of offering more transparency into sort of the composition of their
portfolios. We also see investments being made by utilities, by oil and gas companies, by manufacturing companies and
others to head towards developing new technologies for low-carbon options, as well as emissions technology. So I f eel
like the trend is heading towards a low-carbon future. The question is whether we're moving fast enough to really reduce
the risks fast enough to not have the costs skyrocket.
Andrew Salbarrey
Thank you, Esther. Grace, here's one for you. "If you purchase one of the gases as part of your operation but do not emit,
is it part of the product sold? Would this be part of the disclosures?"
Grace Kao
Sorry, I was on mute. So if you purchase a gas that's part of the product sold, you account for those in the use of your
sold product. So you just have to think where the emissions are happening. So are they happening on site? In which case
it might be part of your Scope 1 and 2. But if they're happening off-site once a customer kind of purchases or uses it or
combusts it, then it would be accounted for in your Scope 3. And obviously, there's different requirements around
reporting your Scope 1 and 2 versus your Scope 3. So it's just about where you categorize that gas exactly depending on
where it actually gets combusted.
Andrew Salbarrey
Thank you, Grace. Okay, I think we have time for one last question. Here's one, Grace. I hate to keep picking on you, but
the SEC-proposed rules asking large companies to disclose Scope 1 and 2 emissions by fiscal year 2023, if a large
company has different manufacturing facilities in different countries, do you know if the emissions disclosure should cover
all of the facilities or only the U.S.-located ones?"
Grace Kao
Yes. I mean I would assume you would want to cover all of your facilities just like you would probably disclose all of your
revenues and things like that. Again, you want to align your greenhouse gas emissions accounting as closely as you can
with your f inancial disclosures if possible. So I think the scope of your emissions accounting would be global for this
disclosure.
Andrew Salbarrey
Thank you, Grace. All right. So I think that's it. We're out of time. All that's left to say is thank you, Esther, thank you,
Grace, f or your time and for presenting. Thank you all for your time, for joining us today. I know everybody's time is
valuable, and we look forward to joining us again soon. Thank you, everyone.
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SEC Climate Disclosure Requirements Heating Up,

How to Take Action

Thank you, Esther.

And can you see the answers?

First one is cut off for some reason.

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