Sustainability Reporting and Disclosure for HVAC/R Pros

 

When it comes to sustainability reporting and disclosure, there is a patchwork of frameworks to choose from for your climate-related financial disclosures. While there is some overlap between them, each has its own philosophy and requirements for the sustainability disclosure that asset managers and other stakeholders are looking for. Some streamlining for sustainability disclosures and corporate sustainability has been done through legislation and rulemaking – for example, Canada officially endorses TCFD and California’s SB 260 would require companies to report according to the GHG Protocol. Still, how you report your sustainability performance can vary wildly.

We’re going to dive into a few of the environmental social and governance (ESG) disclosure models HVAC/R professionals and those working with refrigerant emissions should know as they consider how to create annual reports around emissions, whether through an official task force or another method. While we don’t cover every single one available, these are the ones we see represented the most.

 

Sustainability Accounting Standards Board

One of the first organizations to know about when it comes to ESG disclosures and sustainable investments is the Sustainability Accounting Standards Board. In their own words, “SASB Standards enable businesses around the world to identify, manage and communicate financially-material sustainability information to their investors.”

 

Industries, Risks, and Standards

SASB standards for sustainability reports are broken down by 77 industries. These include consumer goods, food and beverage, health care, technology, and communications, and more.

SASB organizes sustainability risks for sustainable investing into five key dimensions: environment, social capital, human capital, business model and innovation, and leadership and governance. These risks are calculated using accounting standards from the GHG Protocol (see below for more detail). Information is considered material if there is evidence of financial impact and evidence of investor interest. This should be determined through research and market consultation with companies competing in a similar space and investors that may be interested in the company.

 

Greenhouse Gas Standards

SASB has specific standards for reporting greenhouse gases, whether to civil society organizations, investors, or other stakeholders. These sustainability reporting practices consider Scope 1 material in 22 of the 77 industries represented by SASB, and Scope 2 material in 35.

For Scope 1, companies must disclose the percentage of emissions emitted in areas that are subject to emissions limiting or emissions reporting regulations. For Scope 2 and 3, the goal is to capture operational and strategic factors that give rise to emissions. The sustainability reporting framework should also capture levers that management plans to use to reduce emissions.

 

When to Use

Overall, SASB provides companies with a way to show how they are following regulations and how they are considering emissions from a strategic management point of view. It’s a helpful framework to use when looking to capture the strategy your company is taking towards emissions.

 

International Integrated Reporting Council

The International Integrated Reporting Council was created to improve the quality of information available to investors, promote a more cohesive and efficient approach to corporate reporting, enhance accountability and stewardship, and support integrated thinking for the short, medium, and long term. Of the many frameworks available, it is the most focused on governance and how a company is tackling ESG and climate change overall.

 

What Reports Contain

With IIRC, each report should contain:

• An organization overview and view of the external environment
• Information about governance
• The company’s business model
• Risks and opportunities
• Strategy and resource allocation
• Performance
• Outlook
• Basis of presentation

Within these categories, financial materiality is determined by whether or not a matter affects value creation. Both positives and negatives of how a company is operating should be reported to create a balanced view and show how an organization creates, preserves, or erodes value over time.

Connectivity of information also needs to be reported. This will  “create a holistic picture of the combination, interrelatedness, and dependencies between the factors that affect the organization’s ability to create value over time.” This can be shown through an analysis of existing resource allocation and information about how an organization’s strategy is tailored to new risks and opportunities.

A report also needs to show the nature and quality of relationships with key stakeholders and how a company is taking into account their needs and interests. This information should be consistent over time and comparable so stakeholders can analyze differences and similarities with other companies in similar sectors.

 

When to Use

IIRC is a useful framework to use when you want to focus on the overall workings of your company. It allows you to show asset owners how your company is operating from a corporate governance perspective and how it relates to ESG reporting. You can identify gaps and sustainability issues. If you’re looking to granular with emissions data, though, look towards other frameworks that have made significant progress in those areas.

 

GHG Protocol Corporate Accounting and Reporting Standard

The GHG Protocol, one of the more well-known standards especially for large companies in the global network, is an initiative with businesses, NGOs, governments, and others convened by the World Resource Institute and the World Business Council for Sustainable Development. This framework evaluates company performance in terms of relevance, completeness, transparency, and accuracy.

 

Two Approaches

The GHG Protocol contains two approaches to reporting and calculating emissions for external assurance: the equity share approach and the control approach.

In the equity share approach, a company accounts for GHG emissions from operations according to its share of equity in the operation. This is typically aligned with percent ownership in an operation and might involve working together with accounting and legal departments to figure out the exact percentage

In the control approach, a company accounts for 100% of the GHG emissions from operations over which it has control. They must then choose between whether to define this control as financial or operational control. Financial control is defined as an operation having the ability to do direct, financial, and operating policies of a company while gaining economic benefits from the activities. Operational control is when a company has full authority to introduce and implement operating policies.

 

Emissions Reporting

The GHG Protocol creates definitions for Scope 1, 2, and 3 emissions as they should be reported:

• Scope 1 – direct GHG emissions
• Scope 2 – electricity indirect GHG emissions
• Scope 3 – other indirect GHG emissions

These emissions should be tracked over time, with the base year selected from the earliest point in time where there is reliable data.

In addition to this information, a report should have a description of the company inventory boundary. Optional information includes performance and offsets.

 

When To Use

In some cases in the future, your company may be required to use the GHG Protocol – for example, if SEC rulemaking goes through, and if California SB 260 passes, both of which seem likely. The GHG Protocol is also useful to use if you want to disclose information related to emissions. It allows you to dive into these numbers and show the long term value of reducing them from both a climate change and financial perspective. It is one of the more common frameworks, so we wouldn’t be surprised to see more companies and member firms use it over time to report on environmental factors.

 

Task Force on Climate-Related Financial Disclosures

Those in Canada may be most familiar with TCFD – it is the framework that the government has officially adopted. This framework acknowledges the financial implications of climate change that research shows. Its core elements include governance, strategy, risk management, and metrics and targets:

• Governance – a report needs to describe the board’s oversight of climate-related risks and opportunities, as well as management’s role in assessing and managing these risks.
• Strategy – the report must identify risks and opportunities in the short, medium, and long term. It must describe the risks and opportunities of climate change on business strategy, and describe the resiliency of the organization’s strategy taking into account different climate-related scenarios.
• Risk management – the report must describe the organization’s process for identifying climate-related risks, the process for managing risks, and how to identify, assess, and manage climate-related risks in overall risk management
• Metrics and targets – the report must disclosure metrics used by the organization to assess climate-related risks and opportunities. It must also disclose Scope 1, 2, and 3 emissions and describe targets and the performance against them.

 

Scenario Analysis

TCFD also requires that companies include a scenario analysis in their disclosures. This analysis should show how a company is developing strategic plans that are more flexible to a range of possible futures.

The scenario analysis should consider outcomes that are uncertain. It should enhance strategy and preparedness, and help identify and monitor the external environment. It should also explain scenarios used (including the 2 degrees Celsius or lower scenario), critical input parameters, assumptions, and analytical choices, time frames used, and information about the resiliency of the organization’s strategy.

 

When to Use

TCFD is the best framework to use if you’re operating in Canada. If you’re operating outside of Canada, it is still useful for defining how emissions are part of your long-term investment strategy. It forces your company to consider different scenarios related to climate change and make a plan for the future, as well as set targets for reducing emissions.

 

Global Reporting Initiative

The Global Reporting Initiative (GRI)’s goal is it help organizations be transparent and take responsibility for their impacts through a global common language. The initiative defines some main principles for report content:

• Stakeholder inclusiveness – companies must identify stakeholders and explain how they are responding to their expectations and interests
• Sustainability context – companies need to show how they fit into the wider context of sustainability
• Materiality – companies must cover topics that reflect the organization’s significant economic, environmental, and social impacts or that substantively influence stakeholder decisions
• Completeness – there’s no greenwashing allowed. Companies need to show material topics and their boundaries in a specific, defined reporting period
• Accuracy – information must be as accurate as possible
• Balance – even when information doesn’t paint a company in a positive light, it must be reported
• Clarity – information must be understandable to stakeholders using graphs and consolidated data
• Comparability – information must be understandable over time
• Reliability – information presented must be reliable and true
• Timeliness – a GRI report isn’t a one-off venture. There must be a regular schedule for disclosures over time.

 

Scope 1, 2, and 3 emissions

GRI has a specific method for reporting Scope 1, 2, and 3 emissions in reports. All three scopes must be reported in metric tons of CO2 equivalent and include what gasses are being used in the calculation. Biogenic CO2 emissions in metric tons must also be used in the CO2 equivalent.

For the calculations, companies must disclose the base year they are using. In addition, they must include the rationale for choosing this base year, emissions in the base year, and any context for significant changes that happened since the base year.

The following information must also be reported as well:

• Source of emissions factors and GWP rates used
• Consolidation approach for emissions
• Standards, methodologies, and assumptions
• Calculation tools used
• GHG emissions intensity
• Reduction of GHG emissions
• Emissions of ozone-depleting substances, NOx, SOx, and other significant air emissions

 

When to Use

Similar to the GHG Protocol, GRI is useful if your company wants to take a deep dive into your emissions. In terms of which one to choose if you only want to use one, first take a look at if you will be required to use one or the other. As mentioned, GHG Protocol is or will soon be required by certain government agencies.

If you can choose either, it comes down to the philosophy of each. Choose GRI if the principles resonate with how your company wants to relay information.

 

Making Sense of the Patchwork

As you can see, there is a patchwork of sustainability reporting and disclosure models available. Ultimately, as you’re deciding what to use, it comes down to what fits your company’s goals and information best, as well as what you may be required to use by certain government agencies. You may also need to use multiple – for example, using one for emissions disclosure while using another for setting targets.

Whatever you choose, you can’t delay any longer. Investors are expecting disclosures, and governments are beginning to require reporting as well. Trakref can help with getting the information you need for these reports, but it’s ultimately up to each company – and the governments and agencies they’re subjected to – to decide what models they will use.

 

Learn More

If you want to learn more about sustainability reporting and disclosure standards, download our handout that delves into even more standards than we covered in this blog.

Download Handout