The Carbon Disclosure Project (CDP), the world’s environmental disclosure platform, revealed:
As a result, regulators and investors are accelerating action to hold companies accountable. To stay ahead of an ever-evolving regulatory and compliance landscape, organisations must take proactive measures when addressing climate disclosure.
Proactive climate strategies will give companies an edge in staying ahead of regulatory requirements while helping them capitalise on a market eager for social and environmental investment. Companies need to react to changing regulatory requirements that may be inconsistent with customer needs.
For many, now is time to revisit climate strategies, investments and operational integrations to align with requirements. A reactive approach is likely to have significant financial implications. With changing disclosure requirements being published, we recommend the following proactive ‘no regrets’ actions:
Establishing these best practices enables an integrated approach that aligns with and stays ahead of stakeholder expectations and expanding disclosure requirements.
Climate disclosure is becoming mandatory for companies around the world and will require a step change in corporate reporting processes.
Global advisory bodies, like the International Financial Reporting Standards (IFRS) foundation, are developing their own climate disclosure guidelines such as the International Sustainable Standards Board (ISSB).3 Continued jurisdictional uptake is expected to set a baseline for individual countries’ sustainability accounting standards.4
Finance and accounting departments will need to integrate these new disclosure guidelines to meet regulatory accounting requirements.
Implementation timelines for climate disclosure guidelines
There is clear support for stricter sustainability requirements, with organisations proactively requesting them in regions like the EU, where over 60+ companies called on the European Commission to not reduce reporting standards.5 Looking to the near future, climate disclosure requirements are becoming tougher in several ways.
1. Climate Disclosure Requirements are expanding
The Corporate Sustainability Reporting Directive (CSRD) being adopted by the European Commission has broadened its scope from ~11 thousand companies to ~50 thousand listed and un-listed companies.6
“The new EU sustainability reporting requirements will apply to all large companies, whether listed on stock markets or not. Non- EU companies with substantial activity in the EU […] will also have to comply.”
“For Scope 3 emissions, the Exposure Draft proposes that an entity shall include upstream and downstream emissions in its measure of Scope 3 emissions […] if the entity excludes those greenhouse gas emissions, it shall state the reason for omitting them.”
“Investors representing literally tens of trillions of dollars support climate-related disclosures because they recognise that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”
2. Scope 3 emissions are ~11x larger than direct company emissions7
A recent study revealed only one-third of companies report on Scope 3 emissions, the toughest emissions to measure and reduce.8 As reporting requirements are expected to become more stringent and ambitious, every organisation will be impacted by the challenge of managing Scope 3 emissions. Currently, standards like the SBTi require only Scope 1 and Scope 2 emissions reporting, whereas Scope 3 reporting is only required of companies where these emissions make up over 40% of total emissions. However, ISSB, which is expected to become the new baseline for many mandatory reporting standards in the coming years, requires companies to report Scope 3 or account for why these emissions are omitted.9, 10
Implementation status and scope varies by jurisdiction:
Sources: UK greenhouse gas emissions reporting: Scope 3 emissions, EU Corporate Sustainability Reporting, SEC: Climate-Related Disclosures/ESG Investing, Canadian Securities Administrators statement on proposed climate-related disclosure requirements, Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information, Japanese Financial Services Agency - International Conference on Sustainability Disclosure
3. Methane abatement is imperative for near-term decarbonisation
Methane disclosure is an emerging area all organisations need to be aware of particularly in the context of Scope 3. While methane is 28x more impactful to climate change than CO2 and is responsible for about a third of global warming, it only stays in the atmosphere for ~12 years compared to centuries for CO2.
The ‘Global Methane Pledge’, signed at COP26 in 2021, was significantly built upon at COP28 and now includes more aggressive reduction targets and enhanced transparency of methane disclosures for individual companies in major jurisdictions. COP28 also signed off on billions in funding to support oil and gas companies in their methane reduction efforts.11
Methane measurement and abatement technologies
Improving methane monitoring is a key consideration for meeting methane disclosure requirements
Additional abatement measures exist to reduce methane emissions
4. Buying Renewable Energy Certificates (RECs) to meet climate targets is becoming an outdated and costly strategy
The US Granular Certificate Trading Alliance is creating a platform to connect buyers and sellers of RECs with time and location verification for carbon-free energy generation.12 This will help organisations qualify for the IRA 45V hydrogen tax credit which includes strict requirements on energy sourcing from the same time period (hourly matching) and geographical location as the hydrogen production itself.13 The EU also has location-based Guarantees of Origin (GOs) for renewable energy production14 and Australia is developing a similar GOs scheme that will expand to include Renewable Electricity GO certifications (REGOs) which will bring it in-line with the EU and US from 2030.15
But, supply and demand imbalances are leading to costlier RECs. In parts of the US, demand for RECs may grow by 3x in the next decade with only a 2x increase in renewable supply.11
Renewable Supply: Forecast to increase but reliant on many ‘at risk’ offshore wind projects
Projected Regional Renewable Generation to 2033, TWh
Renewable Demand: Renewable Energy Credit (RECs) demand forecast to increase as states sign on to more aggressive targets on many ‘at risk’ offshore wind projects
Forecast of Regional REC Obligations across different US states (A-F), TWh
5. Achieving emissions reductions by matching renewable supply with grid demand
More importantly, annually offsetting fossil fuel use with RECs does not effectively solve the problem of matching renewable energy supply with grid demand to drive GHG emissions reductions. To do this, participants will need to view renewable procurement hourly and address the challenge of meeting peak demand with renewable sources.
Current view is in an annual perspective for offsetting demand
Example: NE US State forecast 2030-2035 annual supply volume, GWh
However, in the future it will change to hourly matching to decrease GHG emissions and meet climate goals
Example: NE US State forecast 2030-2035 daily average supply by hour, MWh
Note: Data representative of single state in New England, United States
Source: Partners in Performance internal analysis and client data
The financial consequence of taking limited climate action include impending carbon taxes along with fines and legal action against non-compliant companies. Nations have already implemented carbon taxes (e.g. EU, UK, Japan, Canada) which are expected to increase and evolve in the coming years. For example, the EU’s Carbon Border Adjustment Mechanism (CBAM) which enters into full force by 2026, imposes import fees on certain goods (cement, iron, steel, aluminium, fertilisers, electricity, hydrogen, etc.) based on carbon content16. Indirect consequences of inaction include eroded market trust, reputational harm, stock price impacts and loss of financing opportunities.
On the other hand, organisations with forward-thinking climate plans will be able to access cheaper financing as large financial institutions support more ambitious climate disclosure standards (sustainable bond issuances increased five-fold since 2018, exceeding $900B in 2023)17. They’ll also be able to secure renewable energy before the market becomes overcrowded and lower their risk exposure by reducing carbon tax liabilities.
The stringent need for time-matched and geographically verified carbon-free energy sourcing means companies not participating in nascent markets, like hydrogen, could face significant unforeseen costs due to a limited renewable energy supply to meet their demand when and where they need it.
Companies with a proactive climate strategy in place will have an edge in navigating this ever-changing environment - not only to reduce risks but also to capture opportunities as they enter the market.
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Director
Peter has more than 25 years of strategic advisory and operational experience across various sectors, including renewable energy, mining and oil and gas, helping organisations find solutions to thrive in a low carbon, low fuel environment.
Partner
Sarah is an experienced executive and advisor with over 15 years of experience, partnering with a wide range of businesses to address the most pressing strategic and operational opportunities within the energy transition area.
Director
Keith has over 30 years of global experience in management consulting. He specialises in operational improvement and transformation in mining, natural resources and heavy industrials, helping clients successfully navigate the challenges of energy transition.
The authors would like to thank Betty Ye, Sam Brouwer and Scott Troolin for their contribution and support in the development of this article.
