The congressional and federal climate action of the last few weeks is likely to have a signiﬁcant impact on the climate movement for years to come. It will also have a snowball effect on American companies’ climate actions. The Inflation Reduction Act has set aside roughly $369 billion for climate and energy projects and tax credits, and the Biden administration has announced a plan to partner with the private sector to tackle greenhouse gas (GHG) emissions from federal buildings by setting agency emissions reductions targets and investing in energy efﬁciency. The Department of Defense also came out with a request for information (RFI) asking federal suppliers if they would be capable of providing their GHG accounting data.
This flurry of federal climate action will create a domino effect on federal suppliers and beyond. What will this mean for your company? Let’s dig in.
It probably will not surprise you that the U.S. government buys a lot of stuff. During the Obama administration, one of us (Mike) met Jed Ela, Nancy Gillis and Kate Brandt, who all worked in Washington, D.C., for the federal government while Mike was representing the Global Reporting Initiative in North America.
This flurry of federal climate action will create a domino effect on federal suppliers and beyond. What will this mean for your company?
Their work, in collaboration with many others, resulted in a little-known but very influential ripple through the U.S. government's own supply chain, the Federal Supplier Greenhouse Gas Management Scorecard. The original scorecard was published in 2015 and listed the government’s main suppliers, including information on whether those companies disclosed their emissions and climate risks, or whether they had set a carbon reduction target.
When it was published, it fueled a great deal of conversation between companies and stakeholders in the ﬁeld. It was a precedent-setting and bold way to allow all interested stakeholders to see whether and how these companies were taking action.
The 2020 iteration of the scorecard provided a more detailed climate action overview on more than 100 companies, including whether they publicly disclose their emissions (via CDP) or have set GHG targets.
The progression of the government’s scorecard is indicative of where carbon reporting is headed. At ﬁrst, stakeholders just wanted to know whether a company reports. Now, they want companies to commit to annual disclosure and prove credibility through alignment with widely adopted carbon disclosure and emissions-reduction initiatives.
In addition to the federal scorecard, the Biden administration’s climate agenda linked procurement as a core part of the government’s ambition to create a net-zero economy by 2050. This is an important piece of the puzzle. It means affected companies (federal suppliers and companies subject to the SEC’s proposed climate rule) will likely be required as early as 2023 to conduct independent audits and provide assurance on the accuracy of the emissions data they disclose.
As seen in the scorecards, many companies are already disclosing GHG emissions and targets to CDP, and some are going well beyond that. Lockheed Martin, for example, is also publishing a TCFD report, an ESG report and an ESG Performance Index.
"Transparency in our environmental, social and governance performance represents our commitment to working collaboratively to achieve sustainability goals that will yield positive outcomes for customers, employees, shareholders and other stakeholders," said Leo Mackay, Lockheed Martin’s senior vice president of ethics and enterprise assurance, who leads the company’s sustainability program and reports on its progress to the CEO and board of directors. "Our continued focus on energy and carbon management include Scope 1 and 2 carbon reduction goals, as well as steps to increase visibility of and, where appropriate, to develop a reduction strategy for key Scope 3 emissions."
Everyone is in someone’s supply chain
As federal suppliers are required to report their GHG emissions to the government, requests for GHG data will ripple across markets. The full extent of an organizations’ GHG emissions can be organized into Scopes 1, 2 and 3. We’ll focus here on Scope 3.
According to the Greenhouse Gas Protocol (GHG Protocol) and the Partnership for Carbon Accounting Financials, every institution’s value chain needs to be accounted for when calculating its Scope 3 emissions. More simply, Scope 3 includes the goods and services your organization has chosen to procure to do business, as well as the GHG emissions of its purchased goods and services. As federal agencies ask their suppliers to account for their GHG emissions, those companies, in turn, will need to ask all their suppliers for GHG emissions data as well.
For example, if the DoD asks the healthcare supplier McKesson to provide its GHG emissions, McKesson will begin the process of calculating its footprint, including Scope 3 (assuming it hasn’t already). From there, the company will likely ask its suppliers for their GHG emissions, regardless whether those companies are also federal suppliers. In its latest Sustainability Impact Report (PDF), McKesson disclosed that it is working with its suppliers to set science based targets for emissions tracking and reduction which will, in turn, help McKesson itself reduce its Scope 3 emissions.
While it is also possible to calculate Scope 3 by using spend-based formulas that simply multiply the amount of money spent, or the amount of goods purchased, by emissions factors based on industry averages, it is more accurate to collect actual emissions data directly from suppliers. Suppliers are likely already receiving GHG emissions questionnaires from customers, perhaps at extremely high volumes. To deal with the high demand for this information, a number of surveying and rating companies have cropped up to gather ESG data on companies, including their GHG emissions.
Still, there are challenges for federal suppliers in calculating Scope 3, particularly for those providing goods and services to national security-related departments such as NASA, the DoD and the Department of Homeland Security. As an example, some companies cannot include sensitive, confidential information for the Scope 3 category "Use of Sold Products," which requests data on the breakdown of the emissions the end-user generates after purchasing and using the product.
A global phenomenon
This isn’t happening only in the United States; the U.K. is directly asking government suppliers to disclose their GHG emissions as part of its own procurement requirements aimed at accelerating progress toward the U.K.’s target of net zero by 2050. For emissions reporting, major government suppliers are already required to provide Scope 1 and 2 emissions and a subset of Scope 3 emissions, including upstream and downstream transportation and distribution.
Other EU jurisdictions have their own means of ensuring that companies' supply chains not only disclose their emissions but reduce them as well. For example, the Netherlands has a CO2 Performance Ladder, which is being considered for the entire EU. It provides companies that are accurately disclosing their emissions, and have a strategy to reduce them, with a certiﬁcate, potentially giving them a competitive advantage.
The snowball effects of world governments setting ambitious climate goals and creating sustainable procurement policies cast a wide net across global supply chains, sparing no company from having to get a handle on the GHG information. Nearly every company of any size is in someone's supply chain. The best thing a company can do, if it hasn’t already, is prepare to measure, manage and reduce those emissions. The time to get started is now.