Sustainable Finance Newsletter: Beware Scope 3 reporting on the cheap

Foxconn Technology

25/10/2023 17:00

By Ross Kerber
       Oct 25 (Reuters) - Last week's rundown on the potential
new costs of California's climate-disclosure laws prompted some
interesting responses from business lobbyists and investors
concerned the actual burden on companies' budgets and executive
attention could be much higher than expected.
    
They worry it will be difficult to determine the costs of
calculating so-called "Scope 3" emissions tied to a company's
value chain. Especially when the concerns come from an
sustainability-minded analyst like Andrew Poreda of Sage
Advisory, I think they're worth airing out. You'll find my
interview with Andrew below.
    
I've also provided links to my colleagues' articles including on
 probes into financial workers' messaging on unauthorized
platforms, the end of a carbon-capture pipeline, and bickering
ahead of the COP28 United Nations climate conference starting on
Nov. 30 in Dubai.

I invite you to connect with me on LinkedIn where I welcome
comments and feedback. If you have a news tip, potential
content, or general thoughts feel free to email me at
ross.kerber@thomsonreuters.com.
   
    This week's most read
  
* WhatsApp clampdown highlights video call compliance threat for
finance firms
* UAW expands strike against Stellantis, hitting pickup truck
plant
* Pilots seek new contracts with airlines amid booming travel
demand
     
    Analyst sees a warning sign in climate reporting cost
estimate
  
Everyone likes the concept of knowing more details about
corporate emissions, but doubts persist about what data is
useful or cost-effective. Based on one widely-cited survey some
expect new California laws on average will cost companies around
$533,000. (Here's a link to it) 
        
Andrew Poreda, senior research analyst for Sage Advisory
Services, thinks that relatively low figure is a warning sign,
since it's not yet clear how to account for so-called "Scope 3"
emissions tied to a company's value chain. 
  
"If you can clear the bar with that low a figure, that means the
data is not going to be so useful" for investment decisions, he
told me in an interview. "I think it's a mistake to make Scope 3
mandatory, making it a prime-time thing when it's not sorted
out," he said.
        
    Scope 1 emissions come directly from sources like company
furnaces or vehicles, and Scope 2 emissions from purchased
electricity. Scope 3 emissions include things like those
resulting from the use of a company's products and disposal at
the end of their life, as this guidance shows.
    
Companies can't control many Scope 3 emissions, Poreda said, and
he worries the standards aren't robust. A onetime naval aviator,
Poreda says a current model to calculate Scope 3 aircraft
component manufacturer emissions focuses too much on the weight
of components and ignores other variables like an aircraft's
overall efficiency. 
    
Another red flag, Poreda said, is that top accounting firms
don't seem to be big fans of the California laws, based on their
public comments. He noted they have only a middling share of the
market to  assure S&P 500 sustainability reports, says a Teneo
study. (see figure 14 on this page). (Also don't miss Teneo's
references to 1980s pop songs).
    
The accounting firms "have been very cautious because they see a
lot of challenges for this kind of reporting," Poreda said. 
        
I ran the critique past representatives for the Big Four
accounting firms, but none commented. The firms have been more
engaged on a pending U.S. Securities and Exchange Commission
(SEC) rulemaking likely to mandate less Scope 3 disclosure,
going by comment letters you can find here and here.
    
    Teneo Senior Managing Director Matt Filosa said while some
smaller firms got a head start in the assurance market, "I think
the Big Four would want to gain more of that market share" as
new rules are introduced.
       
For context, Ideagen Audit Analytics says among 2,452 U.S. and
foreign companies registered with the SEC, with an average
market cap of $20.3 billion, average audit fees were $5.3
million. Suddenly that $533,000 average price tag looks
significant for many companies.
      
Poreda described his firm as pragmatic on sustainability issues
and generally prefers more disclosures it can use to make bets
such as figuring out a utility's exposure to fire season. Poreda
said he is more comfortable with the pending SEC rules, but
worries about the impact California's law will have.
 
 "I feel like California just dropped a nuclear bomb on setting
these standards," Poreda said. 
        
    Company News
  
* Navigator CO2 Ventures cancels carbon-capture pipeline project
in US Midwest - Closely held Navigator C02 Ventures killed a
pipeline meant to capture and store gases from Midwest ethanol
plants, citing unpredictable state regulatory processes, a blow
to U.S. carbon capture plans.    
* Taiwan's Foxconn faces China tax probe, seen as politically
motivated - Apple supplier Foxconn faces a tax investigation in
China, two sources said, potentially disclosed for political
reasons ahead of Taiwan's upcoming elections.
* Offshore wind developers likely to cancel some contracts after
NY decision - Utility regulators in New York denied units of
Orsted, Equinor and BP their requests to increase power
payments, making it likely that power contracts will be revised.
    
    On my radar
  
* Any diplomats who win deals at the COP28 U.N. climate summit
in Dubai starting Nov. 30 should get medals to judge by the
stories from my colleagues about the many divisions emerging
among nations ahead of the event. Fault lines already separate
rich and poor nations, and European countries, and we're still a
month out from the Nov. 30 start date.
* Per the California story above, investors, executives and
activists alike will be listening to what SEC Chair Gary Gensler
says on Thursday Oct 26 in an appearance at the U.S. Chamber of
Commerce in Washington, D.C. to discuss climate disclosure.

 (Reporting by Ross Kerber; Editing by David Gregorio)
 ((ross.kerber@thomsonreuters.com; (617) 412 0093;))