Fugitive Emissions are the Future of ESG Reporting

Companies are becoming more comfortable with reporting on greenhouse gases in their ESG reporting, including carbon dioxide, air pollution, and natural gas. However, there is still one area that many companies aren’t reporting on – fugitive emissions, especially as they relate to refrigerant emissions.

Some companies are beginning to break out their GHG emissions by fugitive emissions. This provides a more accurate look at hazardous air pollutants and total emissions. Environmental science tells us these emissions are a major factor in climate change. They have been legislated through initiatives like the Clean Air Act and highlighted by groups such as the Environmental Defense Fund. It’s no surprise that information about them is crucial for investors who are interested in ESG performance.

Most fugitive emissions are also quickly becoming material. While it still isn’t standard practice to disclose them, some savvier companies are beginning to include them in ESG reports. Investors are looking for this information, and in order to provide them with what they need, it’s important to understand these emissions, how they are becoming material, and how you can accurately report on them in your future reports.

What are fugitive emissions for greenhouse gases?

In short, fugitive emissions are gasses released into the air accidentally. For refrigerants, these often include HCFCs and HFCs.

This is NOT just for the oil and gas industry.

Fugitive emissions used to primarily be thought of in the realm of the oil and gas industry. This makes sense, after all – many emissions come from those industries, and accidents that release emissions are publicized often.

As time has gone on, though, it has become obvious that these emissions come from other industries. One of these is refrigeration – fugitive emissions from some companies can be the equivalent of tens of thousands of cars on the road.

Fugitive emissions do lead to climate change.

Fugitive emissions, including those from refrigeration, contribute to climate change. When they are released in the atmosphere through industrial activities, they can stay there for a long period, which impact the environment.

This means that fugitive emissions should be counted as Scope 1, 2, and 3 emissions in ESG reporting, rather than just being seen as lost commodities. Any emissions should be considered a crucial contributor to the warming of the planet, and fugitive sources need to be reported on to have better control over them.

Some fugitive emissions are considered volatile organic compounds.

Some fugitive emissions are considered volatile organic compounds. These go beyond just impacting climate change.

VOCs have high vapor pressure and low water solubility. They can be a major source of long-term health effects in people and animals, so it’s important to reduce emissions and reduce contact and close proximity.

Where does the EPA currently stand on fugitive emissions?

Fugitive emissions are a big enough problem to be addressed by the EPA (Environmental Protection Agency).

In one of their recent reports, Direct Fugitive Emissions from Refrigeration, Air Conditioning, Fire Suppression, and Industrial Gases, the EPA highlights these emissions as an important source of direct releases into the atmosphere – especially those from the HVAC industry. They also point to the fact that Scope 1 direct GHG emissions are fugitive emissions, and we see many of these in refrigeration and AC.

The EPA also emphasizes that while many global warming efforts are focused on the release of carbon dioxide, fugitive emissions from the HVAC industry are even more harmful. Many have a 100-year global warming potential (GWP). Therefore, reductions and leak detection for these emissions can have a huge environmental impact.

What do you need to know about fugitive emissions and refrigerant?

With this information from the EPA, it’s clear that the refrigeration industry has a duty to manage equipment leaks and follow regulations that assist in curbing fugitive emissions. A recent article from Effecterra further solidifies this argument.

In this article, the author claims that refrigerant emissions are the “Cinderella” of fugitive emissions. They were once obscure and not considered important for the fight against climate change, but over time, experts have changed their opinion. Now, refrigerant emissions are seen as a crucial class to understand.

The article points to Project Drawdown and their realization of the importance of refrigerant emissions. When they found out that refrigerant management is the number one solution to mitigate climate change, they weren’t sure what to do with the information since it seemed so different than what people might expect. Now, though, they know that working closely with the HVAC industry is crucial to curb further warming.

IPCC’s AR6 report further solidifies this claim. This report shows that halogenated gases (certain types of refrigerant) are responsible for 10% of warming historically. In addition, the amount of HFCs in the atmosphere that are leading to more warming is increasing.

All of this is happening while the demand for cooling is increasing.  UNEP estimates that 14 billion pieces of cooling equipment will be needed by 2050 to meet demands. More cooling equipment means there needs to be more attention paid to what they are emitting and how all of this equipment and technology is leading to chemical leakage that affects the ozone.

While there are some international agreements in place, such as the Kigali Amendment, and there is legislation such as the AIM Act on the national level, this isn’t enough to oversee all technologies and the production of emissions from refrigerants. The market is still slow to respond to these changes, and a new study shows that the Kigali Amendment will not keep us below 1.5C degrees increase globally.

 

Making fugitive emissions into “the material”

With this information, it’s no surprise that fugitive emissions from refrigerant are becoming crucial to ESG reports. In order to show that a company is properly fighting against climate change, they need to show that their maintenance programs are properly managing these vapors that release more heat into the atmosphere.

What makes something “material,” though?

Materiality is an accounting principal. It means that something is important enough to impact a business’s operations. In the case of fugitive emissions, it means that the emissions that companies emit are enough to have a crucial impact.

According to Harvard Business School, “Materiality is an accounting principle which states that all items that are reasonably likely to impact investors’ decision-making must be recorded or reported in detail in a business’s financial statements using GAAP standards.” In short, if something is important enough to process and report to investors, it becomes material.

Materiality depends on scope as well. For example, what is material to a small grocer might not be material to a multi-national grocer. With fugitive emissions, the emissions from a smaller company may not be material, but typically, they are with larger companies.

Materiality can also be financial or non-financial. It ultimately depends on how the element is impacting the business. This is why fugitive emissions, at least for large companies, are typically considered material. They may not be financial in the same sense that money in vs money out is, but they still have a large impact on the environment and how a company is operating.

Understanding fugitive emissions and materiality

There are different opinions about what makes fugitive emissions material vs non-material, especially around scope. Some companies consider fugitive emissions material and report them, even in such detail as reporting them as a percentage of their Scope 1 emissions. Others see them as non-material and not important enough to report on.

In Trakref’s opinion, fugitive emissions for refrigerants are material if they are greater than 1% of Scope 1 and Scope 2 emissions. If these criteria are met, then a company’s fugitive emissions are a risk and their facilities are having a crucial impact on the environment.

Is retail now leading the way on the fugitive emissions front?

While many industries, from grocery to data centers to restaurants, have fugitive emissions that could be considered material, retail is leading the way in reporting them for their facilities.

One company reporting its fugitive emissions as part of its ESG reports in the retail space is Dollar Tree. In their most recent report, they reported that Scope 1 emissions make up 212,403 MTCO2e. Unlike many companies, though, they break this down into fugitive emissions. These emissions account for 116,353 MTCO2e. This makes up 55% of Scope 1 emissions and 9.3% of Scope 1 and Scope 2 combined.

Not every retailer is breaking down their Scope 1 and Scope 2 emissions into fugitive emissions, but we believe this is the way of the future. It provides a better glimpse into a company’s portfolio and their facilities. Measured this way, companies can move away from estimated emissions and truly show how they are having an impact on the environment.

Using Trakref’s proprietary Sustainability Factor, we were able to take information from some other retailer’s ESG reports and figure out what percentage of Scope 1 emissions their estimated fugitive emissions would be:

• Leading clothing retailer: 68.67%
• Leading technology retailer: 8.9%:
• Leading hardware retailer: 20.15%
• Leading pharmacy retailer: 27.7%

View the chart below for more detail.

On average, fugitive emissions account for 36% of Scope 1 emissions. With this number, we believe that fugitive emissions should be considered material and should be reported on like Dollar Tree is doing. To have a full understanding of company’s emissions portfolio, investors and other stakeholders need to be monitoring this information, and without seeing percent of fugitive emissions, the information is incomplete.

The SEC wants more air pollution reporting

While not every company is reporting on fugitive emissions currently, we may see this trend accelerate as new legislation and rulemaking is made at the federal and state levels.

At the federal level in the US, the SEC has been moving forward with rulemaking since March of 2022 to make emissions reporting required for publicly traded companies. If all goes forward as planned, these companies would have to report on Scope 1, 2, and 3 emissions as part of their 10-K.

In an article for Corporate Compliance Insights, Karen Alonardo goes into more detail about what this means for emissions reporting. Although fugitive emissions aren’t necessarily a part of this, we wouldn’t be surprised to see more companies follow Dollar Tree’s example and provide percentages to give investors a clearer picture of their emission portfolio.

Part of the SEC’s ruling will help investors with standardization. In the past, investors were keen to use ESG data to make decisions, but lack of standardization in data made it frustrating to determine who was actually making progress in their environmental assessment instead of just greenwashing data. This “Framework Patchwork” as Alonardo calls it will be solved by the rulemaking from the SEC. Companies would need to follow either the GHG Protocol or TCFD, both of which have reporting standards for emissions.

The SEC’s rulemaking also requires that data be attested by a third party. This will prevent companies from being able to greenwash data. Emissions, including fugitive emissions, must be presented accurately, unlike in recent years when companies could get away with presenting numbers in a fashion that made them look more favorable.

Alonardo suggests actions that we at Trakref would also advocate for with fugitive emissions in mind:

• Start calculating Scope 1 and 2 emissions
• Become familiar with the frameworks
• Plan for attestation requirements

We’re only going to see more ESG investing

Beyond being required to disclose certain information to the SEC if rulemaking is passed, it’s also important to stay on top of the latest trends in fugitive emissions reporting because of an increase in ESG investing. According to Natix Investment Managers, 2020 was a breakout year for ESG investing. Investments reached $152 billion. Asset levels reached a record of $1.6 trillion, and ESG investments drove 196 product launches – more than ever.

There are five key questions that companies need to be asking as they look at their ESG reports and prepare for them to become material information:

• Is ESG just another bubble? According to Natix, probably not. There has been sustainable long-term growth that shows that companies need to prepare for the long haul, including how to incorporate emissions into their reporting.
• Are ESG goals financial or non-financial? Investors are creating clearer objectives for the data they are looking for, both in terms of financial and non-financial goals – so companies need to prepare for both.
• Do ESG methods match motives? Companies have to make sure investing strategies are meeting objectives. It’s important for companies to show they are dedicated to ESG by diving into fugitive emissions directly in their reports rather than omitting them.
• How do you measure ESG performance? There’s a lack of consistency in data. Breaking out fugitive emissions directly can provide a better glimpse into how a company’s locations and assets are contributing to the environment rather than greenwashing the data.
• Do we share a common language on ESG? Companies need to find a common ground for evaluating ESG performance. Fugitive emissions can help with this since it shows a greater depth into emissions info beyond just Scope 1, 2, and 3

ESG investing is not going away, and honing in on emissions in these five key areas can show your company’s strengths in preparedness for climate change.

So, how do we improve fugitive emissions?

Reporting, whether through an ESG report or as part of a 10-K to the SEC, is only the first step in identifying fugitive emissions. Once you have your numbers, you need to start working toward reducing fugitive emissions. They’re harmful to the atmosphere, and if you truly want to work to better the environment, phasing down the amount of fugitive emissions you emit is crucial.

In addition, reducing fugitive emissions is crucial to reducing Scope 1 and Scope 2 emissions, which investors look at. According to Trakref’s estimation, reducing fugitive emission leaks by 50% can reduce total Scope 1 and Scope 2 emissions by 5%.

In order to reduce fugitive emissions, you need the right tools in place, including the right software. This is where Trakref comes in. In the past, it may have been acceptable to rely on paper invoices or homemade spreadsheets, but with new reporting requirements and expectations in place, going digital is mandatory to keep pace.

Trakref allows you to measure and manage your maintenance maturity and refrigerant transactions to improve across your portfolio. We also have a Scope 1 emissions module, which allows you to quarterly evaluate fugitive emissions across your portfolio. All of this helps provide a better understanding of your fugitive emissions and how to move forward, whether that means paying more attention to leaks or replacing faulty old equipment. Without the proper data, you won’t know how to move forward. Trust us to guide you through the process.

Right now, the main advice you want to follow for fugitive emissions is “don’t fall behind.”

Reporting on Scope 1, 2, and 3 emissions is no longer enough. ESG reports that your office creates need to include information about fugitive emissions, since they have a substantial impact on the world and our climate. As we see from Dollar Tree, some companies are already providing calculations related to fugitive emissions, and Trakref’s factor shows that fugitive emissions are material even when companies choose not to explicitly report on them.

With new rulemaking from the SEC and increased pressure from investors, we wouldn’t be surprised to see fugitive emissions reporting become the new norm in ESG reporting. If you’re not ready for this future now, make sure you’re taking steps to prepare.

Learn a bit more about fugitive emissions

If you want to learn more about fugitive emissions and ESG reporting, be sure to download our handout.

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