Emily Pierce is the chief global policy officer and associate general counsel at Tempe, Arizona-based Persefoni, which provides a carbon accounting and sustainability management platform. Views are the author’s own.
In an era where sustainability disclosure regulations are tightening globally, companies face mounting pressure to gather, calculate and report greenhouse gas data. This process is challenging and can be complex, but evolving technology can help CFOs meet these demands.
Today’s business landscape requires CFOs to recognize that the demand for GHG data extends beyond regulatory compliance — it's about staying competitive in a market that demands transparency on sustainability risks and the metrics used to assess risks.
Market forces, investor expectations and global trends push companies to be transparent about their climate risks and related emissions data, even if they aren’t currently subject to climate-related regulations. Financial leaders must proactively integrate GHG data into their financial planning, leveraging technology to manage and analyze this critical information. Failing to do so could mean falling behind in both compliance and competition.
This year has marked the beginning of a groundswell of enhanced, regulated reporting on sustainability and climate information. Companies need to understand and be prepared to share information about their carbon emissions, including scope 1 (direct emissions), scope 2 (indirect emissions across a company’s value chain, including its supply chain) and scope 3 (all indirect emissions produced from a company’s entire supply chain).
In the United States, the SEC’s climate disclosure rule, while currently stayed pending litigation, requires U.S. public companies to disclose material climate-related information, including scope 1 and 2 emissions, with an accompanying attestation report. Some CFOs are waiting for court decisions, but developments elsewhere demand action.
Meanwhile, California climate laws will require public and private companies earning at least $1 billion in annual revenue that do business in California to disclose scope 1, 2 and 3 emissions, along with climate-related financial risk. Assurance requirements will be phased-in. Although the implementing regulations are still being finalized, the legislative mandate is clear: GHG emissions reporting will be regulated, and thousands of companies will need to comply.
In Europe, the Corporate Sustainability Reporting Directive is in effect. Large public corporations in Europe have begun gathering data to report sustainability information for FY24 in their next Annual Reports. Next year, this will extend to even more companies, both listed and non-listed. These reports, following the European Sustainability Reporting Standards, will require disclosure of scope 3 emissions and detailed information about transition planning and targets. The standards also require companies to disclose the percentage of their Scope 3 emissions calculated based on primary data provided by their suppliers.
Over the next four years, the CSRD will apply to approximately 50,000 companies, including many U.S.-based firms. Globally, many jurisdictions are in the process of enhancing their disclosure regulations by incorporating the IFRS Sustainability Disclosure Standards (ISSB Standards). These standards also set clear expectations for disclosure of emissions data, including scope 3, and direct reporters to prioritize primary data in their calculations.
Preparing for compliance
As the regulatory landscape unfolds, CFOs must focus on compliance, but they also need to understand how it impacts competitiveness. Regulation is emerging to meet market demand, reflected in voluntary trends like the around 23,000 companies currently reporting their emissions and other data to the Carbon Disclosure Project (CDP), driven by shareholders or business requests. Capital providers are also driving requests as they seek to calculate their financed emissions. Regulations like the CSRD will accelerate this market demand.
CFOs need to help their companies come to terms with their greenhouse gas emissions and their climate-related financial risks. There is a huge amount of data involved and handling it can be extremely resource-heavy.
However, technology offers a solution that can drastically simplify the process. Software automation forms the backbone of a robust carbon data program, and artificial intelligence is increasingly being deployed to streamline carbon accounting and analysis. Benefits include:
- Efficiencies in building a comprehensive carbon footprint: Technology enables organizations to measure and analyze their carbon footprint across all operations, allowing for global data management and granular tracking. For companies with complex corporate structures and multiple reporting requirements, tracking and reporting emissions by segment is essential for efficient compliance with the CSRD, California's climate laws, and the SEC’s climate rules.
- Improved controls and verification processes: Advanced carbon accounting software helps ensure that emissions data is accurate and compliant with regulatory standards. AI can detect anomalies in emissions data, identifying irregularities or errors that could indicate inaccuracies or reporting issues, flag unusual spikes or drops in emissions data, prompting further investigation to ensure accurate reporting, and can also help companies automatically select and apply the correct emissions factors for various activities, improving the precision of their GHG calculations.
- Facilitating scope 3 reporting: Obtaining data from a company’s supply chain poses a major challenge as the data isn’t readily available. Keeping track of primary data and blending that with spend-based estimates is also complex. Technology empowers companies to integrate primary data into their reporting, better reflecting real emissions and informing action, and enables more companies in your value chain to calculate their emissions to share primary data with you.
- Advanced trend analysis: AI tools can rapidly analyze emissions data, both within a corporate footprint and across industries, identifying actionable reduction opportunities for CFO modeling. Technology-driven benchmarking can also help identify actionable competitive opportunities.
CFOs cannot let their companies wait for an ESG regulation to hit before taking the necessary steps to ensure compliance readiness. Onboarding technology from the outset will ensure the mechanisms you build are efficient, effective and reliable.
