Refrigerants Impact on ESG and Sustainability Reporting
Refrigerant management and tracking is the ultimate test of your team’s ability to communicate and collaborate.
URGENT: The Securities and Exchange Commission (SEC) now closely monitors results and standardized disclosures more aggressively for public companies, largely because investors are asking them to provide better data and transparency. Carbon emissions tracking, F-gas tracking, refrigerant recordkeeping, and everything else tied to the annual EPA GHG inventory has moved to the front line of ESG compliance.
HVAC/R activity is now going to need high-quality documentation to support sustainability and compliance obligations. Modern refrigerant tracking software simplifies data collection while keeping every moving part in alignment. Your Business As Usual approach no longer provides you with Investor Quality Data. Refrigerant emissions account for more total impact than carbon emissions from domestic airline travel. It’s time to pay more attention.
Refrigerant management and tracking is the ultimate test of your team’s ability to communicate and collaborate.
What is ES&G?
ES&G (or simply ESG) stands for Environmental Social and Corporate Governance, a set of metrics used to determine a corporation’s social credit score. Investors are increasingly interested in knowing how a company scores on ESG and sustainability so that profits are balanced with impact. Because refrigerants have a significant impact on the environment (1 LB of refrigerant = 1 or more tons of carbon), corporations and governments must carefully report their refrigerant emissions and usage. More than 600 million LBS of refrigerant leak annually in the U.S., which is more than the CO2 emitted by all passenger aircraft travel in the U.S. in 2019—a really big number.
Planned updates & the scope of the responsibility
There are several protocols for reporting, including GRI (The Global Reporting Initiative), a universal standard that is used by approximately 75% of the largest Corporations in the world (190 out of 250). GRI will also be updating their universal standards later this year—a change that will demand close attention. Advisors, investors, and funds all have specific ESG investment strategies that often require the companies they invest in to remain in line with set environmental goals. Other standards, like SBTi and Climate Action Reserve, also deserve recognition and see wide use. Regardless of which one you choose, the expectation is that you are committed to a process and have an ESG and sustainability auditor to validate the results.
What needs to be reported & what are the formats or expectations?
Refrigerant usage needs to be reported as part of Scope 1 emissions. There are several options for reporting, but all include some highly-defined requirements. GRI, for instance, has this specific wording:
Fugitive emissions: these are emissions that are not physically controlled but result from intentional or unintentional releases of GHGs. These can include equipment leaks from joints, seals, packing, and gaskets; methane emissions (e.g., from coal mines) and venting; HFC emissions from refrigeration and air conditioning equipment; and methane leakages (e.g., from gas transport).
NOTE: There is no limit on system size. Refrigerant emissions reporting must account for all emissions activity, large and small. Many companies choose to use compliance records for emissions reporting, but this can be inherently inaccurate and problematic since compliance only requires maintenance records on systems 50 LBS and larger (in the US).
Another reporting protocol, SBTi (Science Based Target Initiative) has a weaker overall “General” emissions tracking requirement, but they also expect submitters to provide a 7% annual reduction target—a difficult task when you are not reporting specifics and estimating emissions; notice the wording is specifically for chemical producers:
Companies that produce or sell fluoro gases (or products that use HFCs) must account for and report emissions during the use of these gases in cooling units/refrigerants or in industrial applications in their GHG inventory under scope 3 category 11 “use of sold products”. Companies must also account for and report HFC emissions associated with the disposal of products that use HFCs in scope 3 category 12 “end of life treatment of sold products”.
However, within the last year, the SBTi has released “industry specific” reporting requirements with many sectors under development. The first protocol to be updated is for the financial industry. Here is their requirement:
Measurement of all seven GHGs (CO2, CH4, N2O, HFCs, PFCs, SF6, and NF3) is required for scope 1 and 2 emissions. Considering data availability challenges, financial institutions should cover all GHGs for category 15 if possible, with measurement of CO2 as the minimum requirement.
Regardless of the reporting protocol, companies are expected to record all usage and we often see gaps in reporting:
- Vehicles: One overlooked emissions source is refrigerant emissions from vehicles including cars, trucks, trains, boats, planes, and any refrigerated containers.
- Equipment of all Sizes? If you are only reporting on a certain size of equipment, make sure to disclose the size and any assumption about items not included in your ESG reporting figures when publishing your filings.
- NEW & Old Equipment: Any new equipment purchases or installations that were included in gas usage can be deducted from your consumption if you are consistent. But be able to back them up with records and details. On average 5-7% of all equipment is replaced yearly.
- Estimating: The EPA has affirmed a 25% industry-wide leak rate, which is further supported by California with a 2019 published value of 23.7%. Therefore, if you are going to estimate refrigerant emissions, use 25% of installed capacity as the basis for your estimate.
NOTE: You will need an inventory of all your installed gas systems.
- Fire Suppression Systems: Many fire extinguishers and fire suppression systems contain PFCs such as R-125, which can be known as FS125 (there are others). Any time a system is used or leaks are noted at inspection, there is an expectation that they will be counted and reported in ESG and sustainability filings.
You are responsible for reporting . . . and all the mistakes . . . so don’t make them.
Emissions reporting is the responsibility of the owner or operator for all Scope 1 directly controlled properties. Scope 1 emissions include:
- 4 emission types:
- Direct emissions from any combustion sources on site
- Direct emissions from any mobile combustion sources
- Indirect emissions from purchased electricity
- Direct fugitive emissions from HVAC/R & Fire Suppression and industrial gasses
- All carbon emissions from company vehicles and any relevant emissions from company facilities
- GHG emissions in metric tons of CO2 equivalent
- Gas emissions for all PFCs (includes CFCs, HCFCs), HFCs, SF6, NF3, N2O, CH4, CO2.
NOTE: Scope 2 emissions, which are separate, would include air travel, commuting, purchased goods and services, leases, transportation, and even waste generated during operations.
At times we have noticed some companies move assets off of their books to avoid reporting them under Scope 1 emissions. These emissions would then become part of Scope 3 emissions reporting requirements. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts within its value chain. Scope 3 emissions include all sources not within an organization’s scope 1 and 2 boundaries. For scope 3 emissions, quantification is not required.
Investor Grade Data
Filings for ESG reporting are often signed by the CFO or a Chief Sustainability Officer (CSO). In all material respects, the results published are based on activity that occurred in the operations. Knowingly false certifications can be subject to criminal penalties. Officers and directors of any company are not allowed to fraudulently influence, coerce, manipulate, or mislead the company’s independent auditor.
This data is very important to the financial health and future of your company.
Officers of the company use the information to plan. Stockholders use the information to invest (or not invest) Customers, employees, investors, and regulators hold keen interest in your ESG and sustainability performance in part because your capital costs, employee retention, and customer loyalty are all impacted by the transparent results you publish.
Given the growing interest from stakeholders and shareholders alike, robust and accurate ESG reporting can differentiate your company and elevate or deflate the role of the CFO—yes, the CFO. Although the responsibility of gathering the data might fall to the CSO, more and more frequently the published statements to the CFO. Therefore, it’s wise to think of this data at an “Investor Grade” and not a “Mechanic Grade” level of accuracy because that’s who is reviewing and relying on these results, directly affecting your company’s value.
Where does the data come from?
Managing the underlying data has typically been the job of the chief sustainability officer (CSO) or the general counsel. However, they rely heavily on operations teams to provide accurate and verifiable values and information. Refrigerant emissions information, in particular, can require the support of construction, operations, sub-contractors, property managers, HVAC/R subject matter experts, (SME’s) stationary and building engineers.
When you start the initiative to review the data integrity of your carbon accounting, it might feel like you are pulling on a tangled string that’s so unwieldy there’s no telling how long it will take to get the knots out. Much of the relevant information around ESG in companies is captured—if it’s captured at all—via manual processes, often in far-flung unstructured documents and spreadsheets that lack conformity. And most times, not in any kind of auditable environment—something that should give any publicly traded company concern or reason to worry.
Here are some key observations or takeaways that you should consider when coordinating your emissions management program or auditing your internal processes:
- Most companies do not even have the type of refrigerant or the charge in each system when they begin the journey, we suggest you start here.
- Policies and processes often lack operational definition and accountability.
- Vendor agreements do not include the right deliverables.
- Everyone outside the C-suite is not looped into the expectations of the data and its significance.
- Training and support for the reporting is isolated to fewer people than are needed to support its success.
- Companies allow operations to drive the results rather than setting goals and defining what is expected.
The most common form of information gathering is the invoice or maybe even a work order or computer maintenance management system. But these systems usually lack three key elements:
- Data structure that enables you to extract certain types of data, because not all material transactions are treated equally.
- Asset logic that ensures all active assets are accurate and reliable. When we onboard clients at Trakref, more than 85% of the assets are not accurate or the information contained in the inventory is insufficient to provide useful metrics.
- The workforce is just recording information at their discretion and the entire process lacks uniformity and conformity with expected needs.
What should you be doing?
Your ESG reporting ecosystem needs to have a similar feel as your financial accounting systems. Getting access to actionable ESG and sustainability data starts simple enough:
- Establish key metrics like those defined in the Sustainability Accounting Standards Board (SASB) but begin by assessing your Asset inventory for refrigerant type and type of refrigerant charge.
- Set goals and then work with your ops people to establish policies. If you write a bunch of policies and miss the step of looping in operations, then you might cut off a significant and capable contributor. Be specific and ensure you capture the amount of refrigerant used and the purpose for every transaction that uses refrigerant on the invoice.
- Create controls, set limits on refrigerant additions, and require additional authorization if transactions exceed a set amount—but ensure you are tracking all transactions, even the ones that your operations people tell you are small… define what is too small so they do not define it for you!
- Establish an accountable reporting process. Accountability is key. Cloud-based refrigerant tracking software like Trakref provides a platform and a standardized process, but you want to engage your workforce and team to make this a win.
- Building out a system for each element of ESG reporting can be challenging, so most companies build a strategy but ultimately struggle with implementation. Although the CSO has responsibility for the data, they have no authority to change the way operations views the importance of this responsibility.
Trakref is a unique solution to this complex challenge. We are very focused on the specific demands of F-gases, refrigerants, and HVAC/R systems tracking. Our pre-built and proven ESG software has been tested thousands of times and has evolved over the past 27 years with the goal of not just capturing the data, but reducing leaks, supporting successful compliance, and making sure your team has the support they need to have an impact at the operations level and success at reporting requirements for refrigerant management.
As mentioned earlier, the Securities and Exchange Commission (SEC) is taking a far more aggressive stance on ESG reporting. Your HVAC/R reporting is now a top priority.
There are many various reasons that companies file ESG and sustainability reports. Regardless of the reasons, the Division of Corporation Finance at SEC has enhanced its focus on climate-related disclosures in public company filings by adding a team of more than 20 professional auditors to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The task force will also analyze disclosure and compliance issues relating to investment.
Our experienced team of refrigerant geeks went into more detail about all the factors and considerations discussed above at our Refrigerants Impact on ESG and Sustainability event. See the informative video here:
Reserve your spot now to learn more, and get your questions answered by the refrigerant geeks! As always, thanks for joining us here on our blog, and we hope to see you next week at the event.
We are refrigerant geeks with proven techniques to manage leaks in our HVAC/R and refrigerant management software.