In today's digital information age, stakeholders expect transparent data reporting from management. One such area is the increased demand for manufacturing companies to provide information regarding environmental, social, and government (ESG) issues through corporate sustainability reports. CFOs are well positioned to lead this effort based on their experience with data collection, reporting, and assurance. Though comprehensive sustainability reporting can be difficult for middle-market manufacturing companies that may lack resources for thorough data collection and analysis, manufacturers should consider reporting specifically related to greenhouse gas (GHG) or carbon emissions.
Regardless of political or personal beliefs pertaining to climate change and its connection to greenhouse gases, there are valuable opportunities for companies when it comes to GHG reporting. Some of these may include:
Improving customer sentiment towards brands
Meeting potential distributor or supply-chain requirements for B2B transactions
Identifying and gaining energy savings and operational efficiencies
Improving employee commitment and positive impacts on talent acquisition
Meeting new expectations of investors and corporate boards
Preparing for new and changing regulatory requirements
Increasing awareness of market disruptions related to climate change
In addition to these benefits, there may be an important international competitive consideration for U.S. manufacturers. Companies based in other countries, particularly in Europe, have both an elevated compliance and cultural focus on these types of issues and resulting reporting. Should international standards eventually be implemented in the U.S., manufacturers here may find themselves behind their competitors.
The most widely used standards for GHG reporting are those released through the GHG Protocol in 2001, which are generally in alignment with the Global Reporting Initiative. According to the GHG Protocol, 92 percent of Fortune 500 companies used these standards in 2016 and self-reported data to the Carbon Disclosure Project. The GHG Protocol Corporate Accounting and Reporting Standard outlines three scopes based on the nature of emissions:
Scope 1 directs the reporting of direct GHG emissions;
Scope 2 relates to certain indirect GHG emissions; and
Scope 3 outlines various other indirect-type emissions by the GHG Protocol.
In addition to GHG accounting and reporting principles, this standard outlines methods for developing emissions goals, conducting GHG audits, and other related items. The GHG Protocol website also offers a variety of helpful tools for companies looking to start GHG reporting.
Expanding requirements: In 2015, more than 190 countries met and agreed to set new significant climate targets as part of the Paris Climate Agreement, which sent a strong signal to businesses around the globe about the future of a low-carbon economy and will likely lead to expanded disclosure requirements and potentially new costs to manufacturing companies with significant carbon emissions.
There is still speculation, however, as experts debate if a cap-and-trade system or carbon taxing is the best way to mitigate carbon emissions. Based on the EPA's administration and the SEC's current position, this is not an immediate risk to U.S. manufacturers.
The global trend, however, does not present the same conclusion. Effective in 2018, the EU Directive on Non-Financial Reporting greatly expanded disclosure requirements of carbon emissions and corporate policies for environmental protection. Another international example is the ESG Reporting Guide for Nasdaq's Nordic and Baltic Exchanges.
The domestic risk assessment could also change for U.S. manufacturers with the recent development of the Sustainability Accounting Standards Boards (SASB). Established in 2011, the SASB is currently working to develop an industry-specific disclosure framework designed to improve the effectiveness and comparability of corporate disclosure on material ESG factors in SEC filings such as Forms 8-K, 10-K, 20-F, and 40-F.
Sustainable supply chains: In 2016, Smart Freight Centre released the GLEC Framework, a guide for shippers, carriers, and logistics service providers on how to report emissions of logistics operations. This framework allows for increased transparency to improve decision-making around B2B transactions. As emissions reduction continues to play an important role in corporate strategy, many companies will become more focused on improving supply-chain emissions.
Along with improved transparency from the GLEC Framework, the GHG Protocol has published a supplement to the GHG standard, the Corporate Value Chain (Scope 3) Standard, to simplify the process of evaluating a company's value chain related to carbon emissions. This evaluation tool will further move the corporate strategy of some manufacturing companies towards sustainable supply chains.
Science-based targets: In response to the 2015 Paris Climate Agreement, many companies are adopting emissions-reduction goals that align with the agreement. The Science Based Targets initiative is leading the way in providing various resources to companies in the development of science-based targets. Based on the initiative's research, 63 percent of executives believe science-based targets help drive innovation. In addition, executives reported a belief that they reduce regulatory uncertainty, strengthen investor confidence, and improve profitability.
Environmental income statements and industry-based analytics: Several companies are developing their own analysis and reporting of environmental impacts. PUMA, a manufacturer in the apparel industry, developed an environmental profit and loss statement that monetizes the impacts its production and supply chain has on the environment. Another example of a revolutionary trend in the apparel manufacturing industry is the development and use of the Higg Index, which is a metric-based tool to easily measure and compare company emissions and ultimately score a company or product's sustainability performance. Tools such as these will begin to provide stakeholders with a clear, quick, and easy way to help manage decision-making with environmental impacts in mind.
Even middle-market manufacturing companies can benefit by addressing ESG issues and risks through corporate sustainability and GHG reporting. To begin exploring GHG reporting, management should align its reporting with the standards set by the GHG Protocol. Furthermore, management should consider establishing processes to monitor trends in GHG reporting.
EKS&H, soon to be a part of Plante Moran, helps manufacturers with a range of issues, including accounting, audit, tax, technology, and transactions. To find out more about how we can help your manufacturing company navigate today's challenges, contact Audit Senior Manager Ben Milius at 303/740-9400 or firstname.lastname@example.org.