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EQ Fall 2012 Carbon reporting graphic

Climate change and carbon risk management are complex environmental and societal challenges, yet fundamental to business sustainability.  Increased regulation and reporting of environmental and carbon exposures, liabilities, risks and opportunities are driven by national, regional, state/provincial and local requirements in the U.S. and abroad.  These obligations have evolved from participation in voluntary initiatives to legislative and regulatory-driven mandatory actions.  While reporting of greenhouse gas (GHG) emissions is only one element of these requirements, statutory financial disclosure requirements for publicly held companies and even country-specific requirements for environmental/sustainability reporting extend these obligations to address strategy, operations, business risk and opportunity management, legal compliance and supply chain issues. 

This article provides an overview of and insight into the complexity of these requirements.  While an overview of the mandatory GHG emissions reporting programs and requirements is useful as a baseline, the focus is on broader environmental, carbon, and sustainability reporting and disclosure regimes across the globe.  These requirements and voluntary venues represent complex carbon reporting and disclosure requirements, as they extend beyond simply reporting a GHG inventory and underscore the importance of preparing accurate and consistent disclosures.

Mandatory GHG Emissions Reporting

The U.S. is faced with a patchwork quilt of GHG reporting and disclosure requirements at the Federal, regional and state levels:

  • The U.S. EPA’s GHG Mandatory Reporting Rule requires annual reporting of Scope 1 GHG emissions for numerous industry sectors.
  • Regional GHG programs are a work in progress, with the most active being the Regional Greenhouse Gas Initiative (RGGI), the first market-based regulatory program in the U.S. designed to reduce GHG emissions from the electric power sector in the Northeast U.S. 
  • Several states have or are developing GHG reporting and regulatory programs. For example, California’s Global Warming Solutions Act (AB-32) requires GHG inventory reporting and verification, and cap and trade program requirements were established in 2012. 

Additionally, for U.S. Federal agencies, sustainability and carbon planning and reporting requirements have been in place since 2009 under Executive Order 13514, Federal Leadership in Environmental, Energy and Economic Performance.  The Executive Order requires annual reporting of Scope 1 and 2, and Scope 3 GHG emissions, as well as setting and achieving goals for energy use and GHG emissions reductions, and broad-based sustainability performance (e.g., water use, pollution prevention, sustainable acquisition).

For companies that supply commodities, technology or services to the Federal government, sustainable acquisition requirements will drive improved sustainability and carbon/energy management performance.  And considering companies that have a global footprint, several countries and regions outside the U.S. require GHG emissions reporting and/or have in place regulatory regimes. Some examples include the following: 

  • Canada has Federal GHG emissions reporting requirements for industrial facilities that emit more than 50,000 metric tons (MT) CO2e annually. Several   provinces require industry-wide reporting of GHG emissions, as well, with varying reporting thresholds and some that require formal verification of   GHG emissions if they exceed threshold amounts (e.g., Alberta, British Columbia and Quebec; 10,000 MT CO2e). 
  • The European Union Emissions Trading Scheme (EU ETS), established in 2005, encompasses monitoring, reporting, verification, and GHG reduction. The scheme  regulates about 11,000 power plants and industrial facilities in 30 countries through a cap and trade system. The airline industry was added to the scheme  in 2012 and the scheme will be expanded to include additional industries (i.e., petrochemicals, aluminum, ammonia) and GHGs in 2013.  
  •  Australia enacted the National Greenhouse Gas and Energy Reporting Act of 2007 (with regulations introduced in 2008). Reporting of GHG emissions, energy consumption and production is required for corporations with annual GHG emissions over 125,000 MT CO2e.   
  •  In Japan, the GHG reporting scheme covers more than11,000 facilities and more than 1,300 transportation companies. Generally, GHG reporting has been required since April 1, 2006 by business operators who emit GHGs above 3,000 tons CO2 annually, and for non-energy CO2 and other GHGs, businesses with more  than 20 employees at the stipulated threshold.    

While this is by no means a comprehensive listing, it is clear that mandatory reporting of GHG emissions is increasing throughout the world. And for the multinational company with operations in any country or region with a reporting and/or regulatory regime, they would be compelled to report in strict accordance with requirements of that regime. Given that there are different compliance requirements based on industry, monitoring, reporting thresholds, verification, and the potential need for GHG emissions reductions, achieving conformance with these requirements can be a formidable challenge.

Environmental and Carbon Disclosure

Beyond reporting of GHG emissions, environmental, social, governance (ESG) and carbon reporting and disclosure requirements are typically embedded in securities and financial reporting statutes throughout the world.  Environmental and carbon risk reporting and disclosure are mandated by the U.S. Securities and Exchange Commission (SEC) under Regulation S-K.  Key provisions of the regulation include:

  • Description of Business (Item 101) – material effects of compliance with environmental laws and regulations, and material capital expenditures for   environmental control facilities. 
  • Legal Proceedings (Item 103) – material pending legal proceedings, and enforcement proceedings that may result in sanctions of over $100,000. 
  • Management Discussion & Analysis (Item 303) – any known trends, demands, commitments, events, or uncertainties that may have a material effect on a company’s financial condition.  

In 2010, the SEC issued an interpretive release, Commission Guidance Regarding Disclosure Related to Climate Change, to remind companies of their obligations under existing Federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents. Similar statutory requirements exist in Canada through Provincial securities commissions, as well.

EQ Fall 2012 Carbon reporting2

European companies must include non-financial information in their annual and consolidated reports, as well, per the European Accounts Modernization Directive, and country-specific enabling legislation. Selected examples of these requirements are summarized below.

And it should be noted that several EU countries and the United Kingdom established such requirements before the EU MD was enacted (e.g., France, Denmark, Finland).

Country-specific requirements can mandate environmental and/or sustainability reporting, as well. Two such examples include Japan and Brazil. Since 2005, registered businesses in Japan have been required to develop environmental reports. In Brazil, all energy utility companies have been required to produce an annual sustainability report since 2006.

And while in the early stages of development, additional climate change and sustainability related reporting and disclosure mechanisms are being developed and have the potential to affect future environmental and carbon reporting and disclosure requirements:

  •  Global carbon disclosure and attestation standards, including those from the Climate Disclosure Standards Board (CDSB), provide guidance on carbon risk disclosure for companies that are expected to follow International Financial Reporting Standards. The CDSB is in the process of testing the developed framework with companies on a voluntary basis. 
  • The International Integrated Reporting Council is leading the development of a global framework for corporate reporting that demonstrates the linkages   between an organization’s strategy, governance and financial performance, and the social, environmental and economic context within which it operates. A  draft framework is planned for public consultation by 2013. 
  • The Sustainability Accounting Standards Board (SASB), a U.S. based, non-profit organization, intends to establish industry-based sustainability standards  for the recognition and disclosure of material environmental, social and governance impacts by companies traded on U.S. stock exchanges. The SASB sees itself as the non-financial counter-part to the Financial Accounting Standards Board in the U.S. and plans to issue a complete set of standards covering 10  sectors and 102 industries by 2015.   

These requirements focus on ESG related strategy, risks, and opportunities, going well beyond reporting a GHG emissions inventory.  Such disclosures speak to the manner in which these issues are integrated into the fabric of a company’s business, and whether and how they are addressed in the normal course of conducting business. 

Voluntary/Industry Programs

Until recently, reporting and disclosure of GHG emissions and carbon risks in the U.S. has been driven more significantly through a variety of voluntary programs and initiatives. These include, but are not limited to:

  • The Carbon Disclosure Project (CDP) - an independent not-for-profit organization, headquartered in the UK, which seeks disclosure on climate change business strategy, risks and opportunities, and GHG data from the world’s largest companies. It has been in place since 2000 and its reporting programs have extended into ranking disclosures and performance (i.e., Carbon Disclosure and Carbon Performance Leadership Indices) and areas of supply  chain management, water, and a global cities project, as well.  
  • The Climate Registry (TCR) - established in North America, it provides a venue to measure, report, verify and publicly report GHG emissions consistently  across industry sectors. Strict inventory reporting and verification protocols, along with several industry annexes, must be followed for entities wishing to report through TCR. 
  • The Carbon Principles - a collaboration between investor-owned utilities, banks, and non-governmental organizations (NGO), it provides a consistent   approach for banks and their U.S. power clients to evaluate and address carbon risks in financing electric power projects.
  • The National Association of Insurance Commissioners (NAIC) - the U.S. standard-setting and regulatory support organization created and governed by the   chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories has developed a reporting and disclosure framework that  applies to insurers with aggregate annual premiums over $300 million for issuance of annual climate risk reports. 

And there are additional voluntary venues, including GHG mitigation project development through carbon offset registries (e.g., Climate Action Reserve, Verified Carbon Standard, American Carbon Registry and many others) and industry trade organization programs (e.g., Global Environmental Management Initiative, Asia-Pacific Partnership on Clean Development and Energy, and others). Each registry or industry program has its own unique objectives, requirements, and/or protocols that govern reporting and disclosure.

Despite the extensive statutory emissions and securities related reporting requirements, many companies choose to participate in these voluntary programs as well.  For example, there are several hundred companies among the Global 500, S&P 500 and FTSE 350 groups that disclose through the CDP. There are over 400 member entities in TCR, within 29 sectors, spanning industry, government and service providers. And even more challenging than what is experienced through statutory reporting obligations, these frameworks have their own sets of requirements and protocols that create yet another set of obligations to manage.

Conclusions & Implications

EQ Fall 2012 Carbon reporting circlesThe complexity of ESG and carbon reporting and disclosure continues to increase, with such disclosures often addressing corporate strategy, risk and opportunity management, and associated programs and initiatives:

  • Reporting and disclosure of GHG emissions has evolved from voluntary to mandatory in many parts of the world
  • Disclosure of ESG performance is becoming increasingly embedded in the fabric of statutory securities reporting for publicly traded companies  
  • While sustainability reporting is largely voluntary, it is mandatory in selected countries and for targeted industry sectors 
  • The bar is being raised on ‘voluntary’ reporting frameworks, driven by stakeholder interests, including those of shareholders and business partners

While there is some overlap between these myriad requirements, they all have their own unique attributes that must be addressed.

As discussed previously and as illustrated above, the accuracy and completeness of such disclosures is of paramount importance. It is essential to ensure that employees, shareholders, and other external stakeholders receive consistent information regardless of the channels used to communicate the information.  


EQ Fall 2012 Carbon reporting circles chart

Multinational companies have the most significant challenge to stay informed of and address developing, changing and new regulations, requirements or initiatives. Not only must they address those that affect them locally, but they need to harmonize how the enterprise approaches the spirit and substance of these requirements and initiatives, where possible.  Perhaps lessons learned from management system and enterprise risk frameworks can point us in the right direction to:

  • Establish systematic processes and effective management controls;  
  • Ensure roles and responsibilities are clearly defined and communicated;
  • Manage risk more broadly than just statutory compliance, as companies often choose to conform with these initiatives – recall that the flip side of risk is  opportunity;
  • Monitor the effectiveness of efforts to identify, understand and address these requirements, and implement improvements accordingly; and
  • Leverage technology to improve the accuracy, completeness and efficiency of conforming with these requirements.

Finally, whether environmental  professionals are working for companies in a corporate, regional, or facility capacity, they are becoming increasingly involved in leading or contributing to developing the substance of these disclosures by participating in areas such as the following:

  • Developing new and sustainable processes and products
  • ‘Greening’ process design and remediation
  • Raising the bar on EHS compliance and risk management
  • Contributing to sustainable supply chain management
  • Innovation in work process and organizational engineering
  • Developing, implementing and leading efforts to achieve sustainable business performance

 In this day and age, a company’s transparency affects its credibility and brand in the marketplace, which in turn can affect revenues and reputation.

Transparency  ==>  Credibility ==>  Reputation