“Scope 3” greenhouse gas emissions — those that companies are indirectly responsible for, via supply chain, product disposal, investments, etc. — are an imprecisely measured but significant source of impact. In this episode, Laura Draucker of the nonprofit Ceres shares her expertise on all things scope 3, including the recent decision by the Securities and Exchange Commission to drop the requirement that companies disclose them.
Text transcript:
David Roberts
Last week the Securities and Exchange Commission (SEC) released its much-anticipated rule on disclosure of climate risks. To the great dismay of climate advocates and activists, it was substantially weakened and watered down relative to earlier drafts. One thing that fell out was the controversial requirement that companies disclose their “scope 3” greenhouse gas emissions.
To those of you who have not kept up on climate-accounting terminology, a quick refresher on the “scopes.” If you are a business, your scope 1 emissions are those generated on site, through the combustion of fossil fuels — think of trucks burning gas or diesel, or furnaces burning natural gas. Your scope 2 emissions are those represented by the electricity you use. You don't emit anything on site using that electricity, but greenhouse gases were emitted generating it.
You are directly responsible for your scope 1 and 2 emissions. Scope 3 gets into all the emissions for which you are indirectly responsible: the emissions embedded in your supply chain, your products’ end-of-life disposal, and your investments.
Three things about scope 3 emissions: One, they are generally larger than scope 1 and 2. Two, they are somewhat more difficult to measure precisely. And three, disclosing them is extremely unpopular with some powerful American business interests, who seem to have browbeat the SEC out of requiring it.
To discuss the history, theory, and practice of scope 3 as a measurement tool, I went to an expert: Laura Draucker, who runs corporate decarbonization practice at Ceres, a nonprofit that works with capital market leaders and investors to encourage sustainability. We discussed where the notion came from, how the emissions are calculated, who is currently required to disclose them, and what might be next in US disclosure policy.
All right then, with no further ado, Laura Draucker of Ceres, welcome to Volts. Thank you so much for coming.
Laura Draucker
Yeah, thanks, David. Thanks for having me.
David Roberts
This is something I've wanted to get into for a long time. So I was so glad that sort of you popped up and the news popped up and everything came together to give me a good excuse. So just to clarify, like I said in the intro, this podcast is not mainly about the SEC ruling, which is interesting in its own right. It's mainly about scope 3 emissions and what they are and why they're so contested.
Laura Draucker
Yeah, and I would say why they're so important, even if they're not part of the SEC rule.
David Roberts
Yes, we'll get into that, too. So maybe the place to start then is just where did these scope, the whole scope notion, what is that? Where did it come from? How long has it been around? What's it used for? Why does the scope conceptual framework exist at all?
Laura Draucker
Yeah, so the scope framework really came out of some would say even the 1992 Rio summit.
David Roberts
Oh, wow. That's way back.
Laura Draucker
Yeah. When companies were starting to think about "what as an entity, what are my emissions?" Started talking about that, and there became a quick realization that they needed some kind of consistency in how they were talking about their entity-level emissions. And so between 1992 and really kind of the early 2000s, people were talking about this. And in 1998, the World Business Council for Sustainable Development and WRI, the World Resources Institute, formed together this initiative called the Greenhouse Gas protocol. And the goal there was really just to provide some consistency on how corporations were accounting for greenhouse gas emissions.
The first standard that they produced came out in 2001, and that was where they introduced scopes 1, 2, and 3. That standard really only focused on scope 1 and 2, but they, of course, talked about scope 3 as kind of everything upstream and everything downstream from scope 1 and 2.
David Roberts
Was it used for anything in particular? Do you know what I mean? Like, when did it become something that companies had more than a sort of idle intellectual interest in?
Laura Draucker
Yeah, that's a great question. Yeah, it was pretty quickly picked up. And I would say that scope 1, 2, and 3, while they're not terms that I think everyday folks know, they're terms that the business community knows very well because of this initial GHG Protocol standard. These terms have been picked up by ISO standards. I think California had a system that came out right around the same time, maybe 2001, that turned into a disclosure platform in 2007 or 2008 — the CDP, which doesn't stand for anything anymore, but I think it originally stood for Carbon Disclosure Project.
They came out in 2000 — I think they also formed around the same time and then started really collecting information from companies in 2007, 2008. And I think 13,000 companies report to CDP today.
David Roberts
And they're all reporting scope 1, 2, and 3.
Laura Draucker
They're reporting some version of scope 1, 2, and 3. Yeah, and a lot of other information as well. So, yeah, it quickly got used and there were a lot of reasons why. Right. I think if you look back to these standards, you'll see a list of business — what is the business case for doing this? Reputational risk: investors are asking for this information. Other stakeholders want to know how much scope 1 emissions you have, how much scope 2 emissions you have. Regulatory risk: this stuff might be regulated someday. So, yeah, it got picked up pretty quickly.
And then in 2011 is when GHG Protocol published the scope 3 standard. So that's the standard that really took kind of scope 3 as a very optional thing to putting a lot more meat to scope 3. What is it? So it splits scope 3 into 15 categories, upstream and downstream. If you image search "scope 3 accounting" or "GHG Protocol," one of the first ones you'll see pop up is some variation of an illustration that kind of shows how this stuff works.
David Roberts
Maybe the point to emphasize here is just that this is not something that SEC was trying to dream up and impose on companies out of the blue for the first time or anything. Like, this is a well-known and familiar practice.
Laura Draucker
Oh, yeah, exactly. I mean, scope 1 and 2 is pretty bread and butter, I would say, for most companies. And I think even scope 3. I think in 2010 there was around 900 companies that reported scope 3 to CDP, and in 2021 that number was over 3000. So, scope 3 is also not brand new. So I think some of the complaints about mandatory disclosures stating like, "This is a brand new concept. It needs to evolve." I think those aren't quite true.
David Roberts
So, SEC dropped it and I guess ordinary people — that's how I talk about people outside my nerd circles — I think when they first hear this, the intuitive response is, "Why does this matter? Like, why aren't scope 1 and 2 enough?" Sort of by definition, if all the entities took responsibility for their scope 1 and 2, you would cover all the emissions, right? You would get everything. So in a sense, my scope 3 is somebody else's scope 1 and 2. So if everybody does scope 1 and 2, why do we also need 3? What is the rationale for it?
Laura Draucker
Yeah, I mean, that's a great question. And what I think it comes back to is what is our goal of doing any of this in the first place? It's not to get a ribbon because we got 100% of scope 1 emissions from every single person. It's not just record keeping, right? It's not just accounting. The reason why we're trying to understand these emissions is because we want to actually manage them and reduce them. So the problem with only looking at scope 1 and 2 is that you really miss that picture of opportunity. So, for example, you mentioned in the introduction that scope 3 is quite large for most companies. It's around 80% of a company's emissions across all sectors.
David Roberts
Is that sort of on average? I'm guessing that varies pretty widely.
Laura Draucker
Yeah, totally. And that is on average. And for some sectors it's less. Right. So steel or cement: loyal Volts listeners will know from the episode you did on cement, right, that these products use a lot of energy and even create emissions in their production. So for cement manufacturers and steel manufacturers, 60% to 70% of their emissions are in scope 1 and 2. But for other sectors — so if you look to Ford or to General Motors, they both voluntarily report emissions to CDP and their scope 3 is 99%.
David Roberts
Wait, Ford, the car company?
Laura Draucker
Yeah.
David Roberts
That's wild to me because they do have factories, right? They do emission generating stuff to make the cars. So just walk us through a little bit. Like, why? What are all those scope 3 emissions that Ford has that swamp its own scope 1 and 2?
Laura Draucker
Yeah, well, 75% of it is use of sold products. So we buy their cars. We use them for 10 years, 15 years —
David Roberts
And of course, all the cars are emitting. Right.
Laura Draucker
So that's a big chunk. And then they have some — again, they use a lot of steel, they use a lot of aluminum. Those are intensive materials to create. So when you put that all together, yeah, their scope 1 is big compared to our scope 1. But compared to the rest of their value chain, it's quite small.
David Roberts
So we call that upstream. When we talk about the steel and cement that they use to make stuff, that's upstream.
Laura Draucker
Yes.
David Roberts
And then when we talk about the cars that they sell and what the cars do, that's downstream. That's the terminology here.
Laura Draucker
Exactly. And then another sector to flag is the food sector. So they have significant scope 3. And most of that comes from the upstream, the purchased goods and services category. And this goes all the way to, it can be more than 90%. And it goes all the way to these consumer facing brands. Right. Hershey's, Starbucks, Kraft. And those numbers sometimes don't include all the land use change and deforestation emissions that result from using these agricultural commodities. So in a lot of cases, experts will say that the scope 3 data that the food sector is disclosing already is not even showing the full picture.
David Roberts
So if your upstream suppliers have large scope 1 and 2 emissions, you as a buyer of their stuff have large scope 3 emissions.
Laura Draucker
Exactly. And I think that the challenge with focusing only on scope 1, scope 1 is, of course, and scope 2. But scope 1 is much easier to calculate. You kind of know how much fuel you buy. You take that amount of volume or mass and you multiply it by an emission factor and you get emissions. Right. It becomes much more challenging when you're talking about these things that are upstream and downstream, but they are the biggest source of emissions and the places where you have the most levers for change. So back to General Motors, right, so if they weren't doing scope 3 at all their biggest source of emission is scope 2.
So what would they do with that information? With only that information, they'd probably be —
David Roberts
Buy some RECs.
Laura Draucker
Yeah, buy RECs, put solar on the roofs of their headquarters and their manufacturing facilities — which of course, is not a bad thing, right; they should be doing that. What they need to be doing more so is driving product design, doing the marketing and advertising to get EVs to be the large scale of their sold products. Right?
David Roberts
So in other words, if you want Ford and GM to use their influence to maximum effect, you need them working on their scope 3 emissions.
Laura Draucker
Exactly. And the same for some of these large food companies. Right. They need to be understanding what commodities in their value chain are having the biggest impact on land use and deforestation, and figuring out ways to leverage their brand names, their money to reduce those emissions.
David Roberts
Well, let me ask this. Another thing I think people trip up on when they hear this is if you account for everyone's scope 1 and 2 emissions, you've accounted for all the emissions. Which means that sort of scope 3 emissions are sort of, by definition, double counting. Like my scope 3 emissions could overlap substantially with another company's scope 3 emissions. So in a sense, we're both responsible for the same emissions. I guess it sounds like you're double, triple, quadruple counting emissions. How do you think about that?
Laura Draucker
Yeah, a classic example of this is electricity generation. So, a utility generates electricity with natural gas, and those emissions are that utility's scope 1.
David Roberts
Right.
Laura Draucker
So then let's say Apple uses that electricity to manufacture its products. Those emissions are Apple's scope 2. And then if a consumer like you or I, we buy those products and then we charge them at our houses with grid electricity, those emissions are our individual scope 2, and they're Apple's scope 3. So there is double counting. But I think what's not true is — that double counting in this situation is not a bad thing.
David Roberts
Right. We're not working in a system where you're trying to take every piece of emissions and assign it to one and only one entity.
Laura Draucker
Exactly.
David Roberts
That's not the point.
Laura Draucker
Yeah, and again, the point is not to do a really good job accounting emissions, right? The point is to identify where risks sit and where emissions sit within a company's value chain and how they manage them. So actually, Apple's doing quite interesting work in this space.
David Roberts
I mean, talk about scope 3. Like Apple is a stuff company. This comes up again and again, like Google or some of these other tech companies are more software-based, but Apple makes a lot of stuff, which means a lot of materials coming in and a lot of disposal on the back end. So, they must care about this quite a bit.
Laura Draucker
And they do make a lot of stuff, and they also make stuff that requires electricity in its use phase. Right. So Apple could spend a lot of time making their products as efficient as possible. And you could argue that they have, right. But they're never going to not use electricity in their use phase, or at least I don't know how that would happen. So electricity is always going to be part of their value chain, both for their customers, but also for their suppliers and for their own operations. So they've recognized this. They talk a lot in their sustainability reports about how they're working to increase renewable energy, particularly in places where it kind of cuts along all these parts of their value chain because it has a double-counted benefit. Right. I say this a lot to my colleagues. If we could get the grid completely clean, we would reduce most companies' emissions by 70% at least.
David Roberts
Well, scope 2 would go away basically, right? I mean —
Laura Draucker
Scope 2 would go away, but even a lot of that is in scope 3 too.
David Roberts
Right.
Laura Draucker
It just really helps to highlight — this is why we talk about policy advocacy as being so important for a company's climate journey, right? It's not just about — maybe you can't directly get that utility company to switch to clean energy, but you can be coming out strong on policy around that. You can be coming out strong on transmission line and modernization and all that stuff that we know we need to get to the point where we have a clean, reliable grid.
David Roberts
Right? I mean, maybe this is sort of obvious and implied in everything we're saying, but just worth stating: so, like, a company's scope 3 emissions, like Apple's scope 3 emissions, can rise and fall for reasons that have nothing to do with Apple, right. That Apple is not — I mean, they could fall dramatically if a bunch of grids clean up. And Apple might not have anything to do with that. But Apple's scope 3 emissions would suddenly look way better. So the line of responsibility here, I think, is loose, let's say.
Laura Draucker
And you're right. And so, there's some, you could argue, that is it fair for Apple to be able to claim the benefit of grids greening? But that's what we need. So I don't really care that much if they're claiming that. And I would love if they and other tech companies were getting out there and doing — some of them are doing it already. but even more advocacy for these policies and just recognizing like being very clear about the benefit of clean and equitable energy access for everyone in their value chain.
David Roberts
Let's talk a little bit then about just the mechanics of measuring this, because I think anybody who just sits down and thinks about it for a while, you get led into some twisty territory. So say my supplier of steel is in my scope 3. What about my steel supplier's supplier of ore? Right. How do you draw a line around this, in some sense, to get all Buddhist about it? Everything's connected. And so in some sense, everything is — all emissions, you know what I mean, are in my scope 3, if you approach it broadly enough. So how do you draw a line around it?
How many levels away from the company are we measuring these things? Like, is it my suppliers' suppliers? And on the waste end: is it the waste, and then is it also the landfill emissions? You could follow these strings out as long as you wanted to. So where do you stop? How do you draw a line around scope 3?
Laura Draucker
So I used to work at the GHG Protocol, and when I was there, we were doing the scope 3 standard, and one of the comments somebody — a naysayer — made at one point is like, "Do I have to include the company picnic in my scope 3?"
David Roberts
It's a good question. These are all judgment calls, too.
Laura Draucker
Exactly. And they are judgment calls in some respects. So the GHG Protocol scope 3 standard does provide some kind of minimum boundaries for the different categries. But typically what a company would do — so, if they're going to get started on their scope 3, I think data that came out earlier this year from FTSE Russell and the London School of Economics really showed that even though there's 14 categories of scope 3, for most companies, there's only two categories that really matter. It's "Purchased goods and services," so that's category one. And "Use of sold products," that's category eleven.
So when we talked about Ford and General Motors, that was category eleven. When we talked about the food companies, that was category one. Financial institutions are a completely different beast, and they're category 15, and that would be a whole different podcast. So really, if you focus in on those areas for purchased goods and services, what you probably have at hand as a company is spend data. How much do we buy and how much do we spend on it? And it could be for 10,000 different SKUs, right? You buy 10,000 different things. In my role at Ceres, we help investors that are talking to their companies and their portfolio about ways to manage these risks.
And a lot of those companies will say, "I have 10,000 SKUs. How would I possibly do this?"
David Roberts
Yeah, because then you have to figure out the embedded emissions in 10,000 different products, which sounds daunting.
Laura Draucker
It sounds daunting. The good news is that it's really easy to get a rough estimate. Even the EPA has a whole spreadsheet of emission factors based on spend. So you can kind of start with spend, maybe group those 10,000 SKUs in different sectors and start to kind of figure out, "Okay, based on how much I spend on this type of grain or this type of packaging or this type of transportation, I can estimate that the emissions are this amount." And when you start to do that, you start to see some patterns. You'll start to see that for some spend categories, the emissions are high, and for others they're really low.
And so when the number is low, a company can say, "Okay, that's fine, that's not material." And so we can either just say, this isn't material to us, or a lot of companies actually just disclose that information and move on. If you read through companies' CDP reports or TCFD reports, if they're disclosing scope 3 and they've calculated employee commuting, and it's a small number, they'll usually just include that anyway. But then if the number is high, like if you've got something you're procuring that does have a lot of emissions associated with it, then that's when you start to figure out, "Okay, what better data do I need to understand these emissions? Are they coming from my direct tier one supplier, or are they coming all the way from a commodity level, like steel?"
You may be using steel, but you may be four steps removed from the steel manufacturer. So really, where's the source of emissions? What are my levels of control or influence on those emissions? As the SEC rule was proposed, and scope 3 kind of came in the news again, there's a lot of talk about data quality —
David Roberts
Yeah, I wanted to ask about that because the first thing, I just want to state, right off the bat, we're not talking about companies literally, quantitatively —
Laura Draucker
No, exactly.
David Roberts
calculating their scope, that would be impossible. You are in some sense — have to use approximations and industry averages and sort of like, you're not literally going down and tracking down your literal, exact scope 3 emissions. That would be impossible.
Laura Draucker
Exactly. And we shouldn't be just blindly trying to improve data quality for the sake of data quality. Right. So again, it comes back to, why are we doing this in the first place? It's to better understand the problem. Where are these emissions coming from? What kind of risk is this putting on my business? How can I start to manage those? If you need better data to understand that, yes, but once you understand that, start taking those actions, right?
David Roberts
Right. Well, how good is the data? Just like for an average mid-sized company, I want to know what's the average emissions factor of a widget X? Do I just go to some database and look that up? And is it available? Is that available for every widget? Like, how good and comprehensive is our data here?
Laura Draucker
I mean, I think it really depends, but the answer is you could get really high-level estimates using freely available data. So the EPA has available. It's not going to get you down to the widget level. If you want a widget, there are databases you can buy. Like a lot of lifecycle assessment databases have a bunch of data, but they're all industry average, right? So it does create — I will give credit to scope 3 naysayers when they say it's hard to show progress with scope 3.
David Roberts
Yeah.
Laura Draucker
And that is true. So once you get to those average data factors, they show you where the problems are. But if you're going to actually try to manage those problems, it can be difficult to figure out how to show the results of those actions.
David Roberts
Right. So, like, for instance, I'm buying widget X, and I find a producer of that widget that, for whatever idiosyncratic reasons, has lower emissions than an alternate producer of that widget, and I switch suppliers. I have, in reality, reduced my scope 3 emissions. But if I'm just using the industry average for that widget, it won't show up in my scope 3. Do you know what I mean?
Laura Draucker
Yeah.
David Roberts
How do you work through that?
Laura Draucker
Yeah. And I think that's why some companies do start to collect data from their suppliers. They start to form relationships with their suppliers. And this is actually one of the arguments that kind of rose to the top of the SEC disclosure debate: that even though the proposed SEC rule had no requirements for large companies to collect primary data from their supply chain, some would, and therefore this rule would be impacting private companies that aren't under the purview of the SEC. The example that was given quite a bit was small family farms, right.
David Roberts
Of course.
Laura Draucker
Yeah, a great example. Large companies and ag businesses would be putting pressure on these farmers to collect the data that they don't have the time or expertise to collect. They would go out of business, yada yada. And that was a successful point that was made.
David Roberts
Well, I mean, any regulation on one company affects other companies in some indirect way. I don't know, that hardly seems dispositive to me. As long as you're not requiring the small farmers to do that. I don't know.
Laura Draucker
Yeah. No. In that particular example, I think if I was a farmer, I'd be a little bit offended by the assumption that I don't already know exactly how much energy I use and all the resources I use. Farmers are quite data-driven and quite savvy with data. But more importantly, there's incentives available for clean energy. There's lots of things available that we want these smaller businesses to be able to access, and understanding their emissions helps them access this stuff. So I thought that that argument, I would have liked to turn that argument on the head, like this is actually something that's good, and we have examples of this.
I think the negative take here is that companies are going to force their suppliers to provide this information and they're going to just cancel suppliers that don't do it. Right. What we actually see in practice is a lot of collaboration. Companies are offering incentives to their suppliers to produce data or helping them figure out how to procure renewable energy. There's a program called Supplier LOCT: 20-plus companies are part of this program where they pooled together all their resources and they hired a consultancy to provide free to their suppliers education on calculating emissions and setting targets. And so this group, Supplier LOCT, just published a progress report and showed that through this program, they've reached 800 suppliers and 96% of them have gotten value out of being in this program.
David Roberts
Well, I mean, just intuitively, from the outside, it just seems to me like for any given business, knowing more allows you to do better, just from a very intuitive point of view. Obviously, knowing where your emissions are, where your money's going, where your risks are, obviously that's going to help you improve your business.
Laura Draucker
Yeah, exactly. There was Adore Me, they're a small womenswear company: they spoke at climate week a couple of years back. They had launched their sustainability program in 2019 and started engaging with their suppliers then. And they actually credit that relationship building with their suppliers as one of the reasons why they survived the supply chain issues during the pandemic. Right.
Because they had already built this collaborative relationship that they were able to grow. I talked a while back to a company that sells, they sell things that use electricity and they had no real centralized place where they were collecting the data for where they sell things. Like, obviously someone was collecting that information, but it wasn't in one place, they weren't using it strategically at all. And so by starting to do scope 3, they actually kind of forced them to do a better job collecting that data. And now they're using that data not just to calculate the use of sold products, but also to help them be strategic about where they grow their business.
And even thinking about that with a climate lens. Right. Like, should we be growing our businesses in countries where they're not serious about clean energy? It's a question they need to ask if they're going to try to keep their scope 3 emissions down.
David Roberts
So, if I'm a big company, I can spend a lot of money, hire a consultant, I can put a division on this or whatever. But smaller companies, what you'd like is to make this as easy as possible for them to give them tools through which they can wrap their heads around it, start to gather information, whatever. How good are the tools? How daunting is this for a mid-sized business?
Laura Draucker
Yeah, there's definitely lots of tools out there. I think some are better than others, and I don't even know them all myself. There's two ways to think about it. One is if you're getting asked for information from a customer, it's likely that what they want to know from you is your scope 1 and 2. And so that is something, again, it's a little bit easier to wrap your head around. It's still hard for mid-size and small companies, usually because they don't have the free staff around to do these calculations, but that's kind of where they get started.
David Roberts
And also, this is just going to throw this in here, even though it's a complete distraction. But in terms of scope 2, there's also the sort of sticky wicket of "Am I measuring my electricity supplier's yearly emissions or am I doing hourly?" Right. This is a whole different subject that we got into on Volts last year, and those can produce different answers. So, scope 2 is not as obvious as one might think.
Laura Draucker
It's not, yes. And it even goes broader than that. I would say that again, if scope 2 is a big part of your emissions, if you're a tech company, for example, you need to be thinking about those tough questions. If it's not, just use the grid average and call it a day. Right. And then focus on where you could be making changes. So the SME Climate Hub is a free tool available for small and medium businesses, it has some calculations in it. And like I said, the EPA has emission factors, so getting started is daunting. But it is possible with things that are freely available. I don't think you need to necessarily hire a consultancy to do this for you, just to get started. Now, you may want to hire a consultancy to help you build in these data collection systems because it helps your business overall. Right, I think one of the things that I find so fascinating by this whole discussion is that somehow managing your value chain is a new concept and it's not at all. Right.
I think that it was introduced almost 40 years ago. A professor from Harvard Business School, Michael Porter, he's credited for introducing this concept of value chains. And his whole idea was that by understanding and maximizing efficiencies in a value chain, a business can add value to its products and services and ultimately increase its bottom line. And that as they work to minimize the risks and the opportunities in the value chain, they stand to gain a competitive advantage. But to do that, they might have to engage with customers or engage with suppliers. And so this is exactly what we're trying to do with emissions.
It just is seen as a dirty word when you're talking about it in terms of managing climate risk versus increasing the bottom line, I guess.
David Roberts
Yeah. So if I'm just like a customer and I'm choosing what company to buy from, it's not clear to me that knowing the company's scope 3 emissions is going to help me with that much. Just because if you're looking at two sort of, I don't know, mid-sized suppliers of widget X, they're going to be using the same industry averages, basically to calculate their scope 3 emissions. And so they're probably going to come out sort of in the same ballpark. You're not going to be able to use this for sort of fine-grained like "I want to buy from here rather than here because they have a 5% better scope 3." This is not really like something that's super helpful for consumers, is it?
Laura Draucker
No. So I think that's one of the other kind of misconceptions about scope 3, that the reason it's that good is because it's not comparable. And so I would say, yeah, this is not the only piece of information you're going to want to use to decide which supplier you're purchasing from. I would argue that that's true with anything. I don't think there's just one piece of finance — you're probably not going to make a decision only on cost. If you are, you may be missing out that this company has a bad reputation of not delivering on time or they are located somewhere extremely far away, right, and you need more time-sensitive delivery.
There's just a whole host of information that needs to be considered. And I would say from an investor, they're probably not looking at just one financial piece of financial information to make a decision. So what this is doing is adding to kind of the ability to inform decision-making. If you're concerned about climate and you're concerned about the impact of purchased goods and services on your own inventory, you might want to ask that supplier, "Do you calculate your emissions? And if you do, do you have a target to reduce your emissions?
How are you managing your emission risk?" It doesn't mean that you would say, "If you don't do this, we're not going to buy from you." It might mean "If you don't do this, we're going to put you in this program that helps you do it." But, yeah, it's not on its own — and I would argue that scope 1 on its own doesn't tell you anything either. I think there's lots of examples where managing climate is held to a different standard than all the other decisions we're making, particularly financial decisions.
David Roberts
I think people are very familiar, I think sort of like mainstream political discussion is much more familiar with talking about the kind of national security risks of supply chains. We talk about that stuff all the time and I think we understand on some level that it's not precise, but that it matters.
Laura Draucker
Yeah. Or even like back in the stuff with the sweatshop, human supply chain things. Very quickly companies went from, "we don't know anything" to that not being an excuse they could make anymore. We're still kind of, I think, in that phase with scope 3, some companies want to kind of dig their head in the sand and say, "Oh, we can't know about that. We have no control." I mean, I think the headline last week, right, was Exxon saying it's our faults.
David Roberts
You'd think with all that money they'd have a higher budget for corporate communications coaching. Maybe Exxon don't tell people that climate change is their fault. So, part of the rationale for all this is that you're trying to surface and understand risks, climate risks in your supply chain. And this is supposed to be one of the reasons why it's good for you to calculate your scope 3 emissions, because then you can sort of identify where those risks are. And when we talk about those risks, like if I'm, I don't know, a mid-sized business in a red state run by a red CEO, and you're here telling me that I need to understand these risks, I might say, "Look, the actual physical risks of climate change to me and my supply chain are relatively minimal. The risks are all coming from the risk of regulation, and it's you people who are passing the regulations. So it's kind of rich for you to say, like, 'You need to understand the risks that we are now imposing on your business by regulating it.'"
Do you know what I mean? For most businesses, the risks are going to be mostly regulatory rather than sort of direct risk of climate effects. Is that accurate?
Laura Draucker
Yes and no. I mean, I think you're right. Well, I guess it depends on who's the we here. So I think a lot of times it's investors, right, asking companies to disclose these risks. Because I think we have reached a point, I think most people would agree that climate risk is financial risk, right. The more that we raise the temperature, the more that we emit carbon, we're going to have to pay significant amounts of money more to deal with that later than we already are having to do now. Right? And I think we do see — I think it was last year — I saw a headline, "Tyson Foods quarterly earnings down because of drought."
Right. The article didn't say climate change, but that's related. Yeah, so, it is not for all companies; you're right. But for some companies, it is having impacts now. And investors want to know that because of the regulatory risk. And it's not just regulatory risk in the US either, it's global. Right? So, yeah, it's a bit — those of us who are pushing for climate action are pushing on all sides, right. Voluntary regulatory, et cetera. But I do think it's a true risk and a risk that seems a little bit easier to manipulate in the US than other countries, unfortunately.
But like with scope 3 accounting, right? So it didn't make it into the final SEC rule, but it is in several other regulatory rules. It's, you know, part of the California rule; it's part of, I think Japan and the EU both have regulations in place to require scope 3 accounting. So these large multinationals, they're going to have to do it anyway.
David Roberts
What would you say about someone who said, "In the US in the year of our Lord 2024, one of the biggest regulatory risks is that existing regulations are going to get nuked when Trump gets elected?" I mean, the regulatory risks, sad to say, are not all on one side here.
Laura Draucker
That's true. But it's easy to complain about climate action. And then you look to who's spending all the IRA money, and it's a lot of the red states are benefiting from. We don't really have climate regulation in the US. The SEC rule is not climate policy by any stretch of the imagination. Right. So it's just about disclosing risk.
David Roberts
IRA isn't either, really. Like EPA has some stuff.
Laura Draucker
EPA has some stuff that may be damaged. I mean, I think it feels a little dire in the US if I'm totally honest. Right. Not only the election but just the anti-ESG campaign has done a lot of damage. And you had a great episode on this, you know, last summer and it ties back to this. Right. It used to be that companies did feel that they had a reputational risk for not reporting scope 3. And now I feel like that's been taken away a bit because the anti-ESG and anti-regulation has put so much confusion out there about scope 3 and misinformation that companies say "I can't risk disclosing this information because somebody might use it incorrectly."
David Roberts
Right. They want to make doing the right thing risky, right?
Laura Draucker
Exactly.
David Roberts
And this is just like — you got to hand it to the right-wing oligarchs — like, they identified that this was happening and that it was a risk to them. And so they just set out to muddy the water and destroy it with a massive coordinated media campaign and voila: a couple of months later, they've scared the entire corporate sector. They've got the entire corporate sector hiding in their offices: "don't yell at us again." It's amazing their ability to do that at will.
Laura Draucker
Yes. And it has had impacts we've heard from companies over the past year: "I'm not going to do scope 3. I'm waiting to see what happens with the SEC rule. I'm waiting to see what shakes out." So we definitely have our work cut out for us to continue to push on these voluntary measures. Because 3000 companies-plus report scope 3. Because only voluntarily. Right. And we don't want to lose that because we gain a lot of information from knowing where these risks occur.
David Roberts
One other objection I wanted to run by you, and this is, I actually saw a guy interviewed about this and it was on stage at one of these Wall Street Journal conferences. Just funny, like just a conclave of wealthy people kvetching about things — it was always amusing to me. But his point was, it might be true that for my business I face some risks from climate, in terms of reputation, in terms of regulation, in terms of whatever. But I have a CFO: I'm already obliged by law to report material risks to my shareholders. So insofar as these risks are real and material for me, in my judgment, I am going to report them.
Why do I need this one size fits all framework that forces me to do it a particular way, why not just let CFOs discharge their duty to report risks the way they see fit for their individual businesses? Why impose this one size fits all solution on everyone?
Laura Draucker
I think that's where comparability is such an interesting concern, I guess, cited. Because it's cited on both sides. Like it's cited from people who don't want any mandatory climate action and also those who really want it, right? Because I don't think we clearly articulate what we need or want or reasonably expect. And so I think what comparability needs to be is to inform and have confidence in the information. So I think if everybody had confidence that the CFOs were consistently managing climate risk and understanding it and including it, then we probably wouldn't need to add more to it.
I'm assuming that's not the case because investors were the ones that were pushing right for the SEC to add this disclosure.
David Roberts
But then, if you're an investor, you have some power. Why not go to the company and say, "I don't think —" or why not sue or run an investor activism kind of thing? "I don't think you're accurately doing this." Why not go after the individual companies?
Laura Draucker
And some investors do that. None of that is binding in the US. So even if a shareholder vote, a resolution went to a vote at a company and it got 80% of the shareholders to support it, the company doesn't actually have to do anything on it. I mean, they probably would because it looks bad if they don't. But there's no law that says if you don't do this, you will be in trouble. Right. So again, that still kind of all falls into this camp of voluntary action. It's voluntary for the investor to ask for that information.
It's voluntary for the company to disclose it. And when the investors are representing our money, right, when they're pension funds or other things, I think we all should want them to have access to all of that risk information and feel confident that the company is really considering this risk over not just a very short time frame, but over a longer time frame and inclusive of climate.
David Roberts
Is it fair to say that US companies are laggards on this? Where do they require scope 3 reporting? And is the US an outlier in this respect?
Laura Draucker
In general, yes. The US companies don't like to be told what to do, and they want to do it in their own way. Does that mean that they're not doing good things, not always. But there is that air about US companies that doesn't seem to be the same in the EU or Asia or other places. Right.
So, yeah, scope 3 is going to be mandatory. It's rolling in to be mandatory in the EU, in Japan, there's the ISSB, it's the International Sustainability Standards Board. So they came out with their standards last August or July, I think, and they include scope 3 disclosure, and then it's up to countries to adopt those standards and some countries are starting to adopt them. So, yeah, I think that for a lot of US companies that operate internationally, they're going to have to do this anyway. I think the Fortune 500, maybe 40% of them, disclose at least some scope 3.
What the data out of FTSE Russell and London School of Economics showed, though, is that when you sort of correct for materiality, that number goes down. So some companies will report some scope 3. Like a lot of companies report business travel and employee commuting. For very few companies are those material emissions, but they're easier to calculate and so they report those and then they can get credit for being like, "We report some scope 3," but they're leaving out the huge amounts of emissions in their purchased goods and services or their use of sold products.
David Roberts
Do you feel confident saying to a US company, "This is inevitable? Like quit fighting the tide, you're going to have to do this regardless one way or the other, so just get on board." Or how confident do you feel in your heart that this really is inevitable?
Laura Draucker
I think for the largest companies it's inevitable. The anti-regulation, anti-ESG folks, they're not winning in the sense that they're not getting a lot of laws passed, but they're winning in the sense that they're slowing down this action. So, the SEC's already been sued over this.
David Roberts
Yeah, they sued right when the thing dropped. It was amazing. Same day.
Laura Draucker
Even though they think it's a step in the right direction, but it is watered down from the proposed rule and they did take into consideration a lot of the concerns folks had about scope 3, whether they're legitimate concerns or not. Right. But I think we're going to see that have — it could have a chilling effect on California.
David Roberts
Because California, yeah, we should just say California has a rule like this on the books.
Laura Draucker
They do.
David Roberts
California requires scope 3 reporting.
Laura Draucker
Yep. And that does impact companies that do business in California. So it has a wider reach than just California-based companies, but it still needs to be implemented and it needs to get — budget needs to be allocated to implement it. You know, a lot of people are going to use the SEC final rule as a reason to try to convince California to back off of scope 3.
David Roberts
Oh, interesting. Yeah. I kind of feel like at this point, if you don't get sued by the attorney general of West Virginia, you're not trying hard enough. Your rule is not strict enough. One final sort of objection question, and we can cover this quickly, but just I think another kind of intuitive response to this is I can see, like, if I'm Apple or Microsoft or some big mega-corporation, I can see how I can put scope 3 information to use. Like, I'm big enough that I can pressure my suppliers and they have to care. Right. I can throw my weight around a little bit.
But for most companies, like most mid-size or small companies, they're middle-sized fish in a big pond. It's just not clear to me what they can do with this. They don't have that much influence over suppliers or that much influence at all, really. So it seems like — and this is another big objection I saw when I was reading around about this — it's just that this rule is going to require companies to gather a bunch of information that for most companies isn't actionable. There's just not much they can do with it. And so it's sort of, by definition, wasted time.
How do you feel about that? How do you respond to that?
Laura Draucker
The first response is that this rule really only applies to large filers and large accelerated filers. Right.
David Roberts
Is there a cut off or a size?
Laura Draucker
Yeah, I don't know it off the top of my head, but it's a lot of money.
David Roberts
Only big companies. Okay.
Laura Draucker
Yeah. So the SEC rule, and it's only publicly held companies, too, right?
David Roberts
Right.
Laura Draucker
So it's not going to capture the middle of the road companies. Those companies, though, will — this has been happening: people have been reporting scope 3 for over a decade, and since reporting scope 3 have been trying to engage with their supply chain on these issues. Right. So these companies are going to, if they haven't already, they probably will get information from, or requests for information from their customers. So in some ways, that's the reason they're doing it, because their customers are asking for it. Is it actionable to those companies? I think it depends. I think it's hard to say with a broad stroke.
Maybe this is my Pollyanna view, and you said it earlier, too, right: understanding information doesn't hurt. You don't want to spend a ton of time on it if it's not going to be valuable. But you kind of don't know what you don't know.
David Roberts
Right.
Laura Draucker
And local small businesses are the ones that I think have the biggest — I mean, maybe not the biggest, but they have influence on local decisions.
David Roberts
Well, I mean, one thing I was thinking of, like, if you're in an industry, in the widget x industry, and all your widget x companies do their scope 3 emissions assessments, and they all find, "Hey, this sort of common supplier to all of us is where our emissions are concentrated. We could collaborate across the industry to try to push the supplier or to get a different supplier." Do we see that kind of thing happening? Like, if businesses are joining together to sort of increase their influence?
Laura Draucker
Yeah, I mean, antitrust — antitrust disclaimer. But pre-competitively, of course: that's what we want companies to do to understand this one input, this cashew. We buy a lot of cashews, and cashews create a lot of deforestation and have a lot of impact. But I myself, even as a big company, don't have much influence. Could we all come together and try to figure out how to help the cashew farmers manage their risks? That would have a benefit to the cashew farmers, too, I think. So information overload is a problem. We don't need too much information. We don't need all the detailed understanding, but we do want to make sure that we're using all the levers and all the tools in our toolboxes.
David Roberts
Right. It seems like a lot of this is directional. Like, you just kind of know where to point your efforts.
Laura Draucker
Exactly. And I think to the folks who say, "Well, just if everybody does their scope 1, we just calculate all that up: that's the easy way to do it." And to that, I would say, that only looks in one direction, basically. And so it's not helping us to see kind of the big picture. It's not helping us to see the fact that, "Hey, electricity overall is a huge part of my scope 1 and my scope 2." And yet, you know, you look at the data from the US; I think Rhodium Group just came out with something. We are not on track to decarbonize our grid.
David Roberts
Got a pod on that very subject with a guy from Rhodium that is publishing this, well, this Friday, last Friday, I guess, from listeners' perspective. Okay, well, we're out of time. We've scoped 3 our whole hour up. But just by way of concluding, all of this is governed by the GHG Protocol, as you say, which was developed a while back. And that's the sort of rules that's supposed to be helping people get their head around how we do this. The GHG Protocol is in the midst of being updated. So just tell us a little bit about what is that process?
I don't know what technological advancement would be in this area, but do we know a lot more than we knew a decade ago, when we did the first GHG Protocol? What does the update process look like?
Laura Draucker
You're exactly right. The GHG Protocol is undergoing an update process. I think that their timeline is to have an updated corporate and scope 3 or all scopes — so corporate scope 2 and scope 3 standards in 2025. I think that this is where I'm hoping that we can get into some of the details on how to show progress that I talked about earlier. It's hard to do that with average data, but companies want to be able to, and not all actions from day one are going to reduce emissions. Some of those actions require a much longer time to implement.
So I think they'll focus on that. I think they'll try to address some of the comparability issues folks have raised. But the problem is that when we actually try to make decisions that will increase comparability, no one can agree on what those are. So, you know, I said before, there's kind of two categories of scope 3 that are most relevant to most companies, right? So one way the SEC or someone else could have made more comparability is just to say, "okay, only those two categories." But like, when the chamber, in their letter to the SEC said that they were, "developing workable", they wanted to "collaborate, to develop workable practices and methodologies that could produce consistent, comparable scope 3."
They're not talking about this, right? They don't want just two categories because they don't want any scope 3. So that's going to be the challenge of the GHG Protocol. For the GHG Protocol is figuring out where is comparability actually doable, where can we simplify things? But it's likely that there's going to be folks on both sides saying yes or no to that. So I think it's going to be an interesting process, particularly with all the anti-GHG, anti-regulation stuff going on.
David Roberts
That's kind of hitting a fever pitch right when this process is underway. It's kind of unfortunate.
Laura Draucker
Exactly.
David Roberts
Well, maybe we'll reconvene in 2025 when it shows up —
Laura Draucker
That sounds great.
David Roberts
see what happened. All right. Thanks so much, Laura. This is super fascinating, super educational. Thanks so much for taking us through all this.
Laura Draucker
My pleasure. And always happy to talk about scope 3.
David Roberts
Thank you for listening to the Volts podcast. It is ad-free, powered entirely by listeners like you. If you value conversations like this, please consider becoming a paid Volts subscriber at volts.wtf. Yes, that's volts.wtf. So that I can continue doing this work. Thank you so much and I'll see you next time.
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