The E in ESG

Listen to our environmental experts, Andrew Horwath and Kris Macoskey, discuss the impact consultants can have on clients’ environmental strategies. Andrew and Kris explain how CEC can help companies assess their Scope 3 emissions now to better prepare them for the future.

Podcast Transcript

Announcer: Announcer: Welcome to CEC Explains — your deep dive into fascinating subjects from the worlds of engineering and the environment, brought to you by Civil & Environmental Consultants. And now, from our CEC studios around the nation, this is CEC Explains.

Andrew: Hi, everybody. Thanks for joining us today. This is Andrew Horwath. I am a principal and the Environmental Practice Lead in our Indianapolis office, and today, I’m glad to get together and have a conversation with Kris Macoskey out of our Pittsburgh office. Kris is a Vice President and leads the CEC Sustainability and ESG or environmental, social, and governance initiatives at our company. Welcome, Kris. So, tell me a little bit about yourself and what you do here at CEC.

Kris: Thanks, Andrew. Nice to be with you this morning. Well, I’ve been a practicing air quality consultant for over 35 years now. And at CEC, I provide leadership in air quality, permitting, and compliance services. Throughout my career, I’ve worked with a wide range of industries throughout the U.S., and one of those areas has been evaluating atmospheric emissions from facilities as part of new installations and compliance requirements. You know, atmospheric emissions are a key component of air quality permitting and compliance services. And, while the greenhouse gas aspect hasn’t been historically a requirement, it was – it’s been over 10 years now since U.S. EPA has required businesses to report emissions if they exceed large quantities of greenhouse gases. So, back in 2009 when that became a rule, CEC jumped right on into it and was starting to help clients with those emission calculations and have been doing that ever since. So, that’s just one of the wide ranges of air quality services that we provide.

And over the last few years, as ESG-type topics have become more and more prevalent and of interest to our clients, we’ve been developing services to help them in those areas as well.

Andrew: Alright. Thanks, Kris. With your experience, especially in the past decade you know, we’re going to be here today to discuss the impact that environmental consultants have on our clients’ ESG strategies particularly the E, the environmental, in ESG.

So, for the uninitiated, the Securities and Exchange Commission or SEC has proposed some certain rule changes that would require certain companies to include climate-related disclosures during periodic reporting, during registration. And the intent of these changes is to provide investors with consistent, comparable, and decision-useful information.

The SEC reports that investors have been kind of clamoring for this. Investors are representing tens of trillions of dollars – you know, trillion with a TR. They’ve been supporting the disclosure of this information. So, the SEC is finally responding to the market a little bit with these proposed rules that they’ve come forth with.

And as part of those rules, the SEC has included climate disclosures requiring Scope 3 emissions, Scope 3 emissions being, you know, greenhouse gas emissions through a corporation’s supply chain, both upstream, downstream, and these are different than your typical Scope 1, Scope 2 emissions.

Scope 1 emissions being greenhouse gas emissions from the direct operations of a corporation, their day-to-day activities, what they do. And then the Scope 2 emissions being the purchase of electricity, steam, heat, cooling, all that good stuff. But today we’re going to be focusing on that Scope 3. Scope 3 it’s hard to determine where those boundaries exist and how that’s going to be defined.

We’re all kind of sorting through this right now, but, as it stands right now, there are about 15 categories of Scope 3 emissions. And today, we’re going to revolve this conversation around probably how environmental consultants have an impact and can help clients quantify, track their emissions.

So, that being said, Kris, and jumping right in, the recently proposed rule changes: Where do you see some of the greatest impacts, from a Scope 3 emissions perspective that we can have as consultants?

Kris: Yeah, well, you know, it’s a very timely subject, Andrew. Especially considering yesterday, we had, if you watched the news last night, it was all about record heat waves in Great Britain, highest ever temperatures reached there. And the connection was made very clearly in the news between greenhouse gas emissions and climate change and all of these heat waves as a reflection of that issue.

You know, the Paris Accord back in 2015 was a global attempt by leaders of nations around the world to get everybody on board with goals to achieve a minimum 1.5-degree C increase in global temperatures. We’re at 1.1 degrees now. Something doesn’t really seem to be working very effectively. And maybe the SEC is recognizing that, given that public corporations have embarked on the effort to disclose information voluntarily to their stakeholders using their websites and their corporate sustainability reports, that there’s an opportunity and a need there to be involved with the content and how these corporations are assessing and evaluating the implications of climate change on their operations. Maybe there need to be some rules established for ensuring that everybody’s on the same playing field here and that everybody’s doing these things the same way.

So, I think that’s really the gist of what’s coming out of the SEC at this point that they’re trying to help establish some level playing field and consistent approach to guiding public corporations, and we’re not talking about private corporations here, talking about public corporations. But when they pull in the Scope 3 emissions, there’s a huge implication for how that’ll trickle through the economy and affect other businesses as companies start to dig into what Scope 3 emissions really are and how to quantify them.

So, I think that’s probably the greatest impact. It’s just this increased scrutiny and hopefully some consistency in methodologies so that everybody is assessing and evaluating these issues the same way.

Andrew: OK. Yeah, and I’m curious what you think about the timing of everything and how consultants can start to get ahead of the curve because I know right now some people are saying that the SEC’s approach is a little bit aggressive. Right now, the schedule from implementation is to start tracking for fiscal year 2023 for certain larger corporations, with reporting in 2024. There’s going to be a yearlong grace period, I think, for smaller companies.

Then, on top of that, those Scope 3 emissions we’re talking about, I believe there’s an additional year above and beyond that schedule, which I think will give some of these companies, an idea of others’ Scope 1 and 2 emissions, so they can incorporate them into their Scope 3 emissions, right? So, that’s well and good, but it does – I know some people are making the comments that it’s a bit aggressive. And also, when it comes to costs, the SEC currently is proposing or has estimated, I should say, that for larger corporations, the cost could be in excess of $600,000, could be upwards of $640,000, smaller companies probably below the half million mark in the first year of compliance. That’s – to me, that seems like a pretty staggering number with about 30% of those costs being internal. So, they’re estimating that a lot of these corporations are just not going to have the internal capabilities to handle the tracking, to handle the monitoring, the reporting, and just kind of bringing it all together.

But I’m curious what you think. How do you think consultants can help their clients get ahead of the curve, start reducing that burden of cost? Maybe turn that over $600,000 per year into something that’s a little more palatable, right? And just get ahead of this thing before the reporting requirements kick in in 2024 or 2025. What do you think?

Kris: Yeah, that’s a great question, and I’ll focus in on Scope 3 here in a second. But I just wanna kind of put things in context because major corporations have invested a huge amount of money already in this, the whole ESG reporting process, and Scope 3 emissions are just one small part of that we’re talking about here because SEC is focusing attention on it. But I think the relative cost magnitude of the Scope 3 emissions piece is probably small compared to the investment that corporations have voluntarily made in response to their stakeholders and other concerned and interested parties to embark on this ESG process. Again, it’s a voluntary initiative aimed at helping constituents, shareholders, employees, and other interested parties in the operations of an organization to see what they’re doing from the E, S, and G perspectives. We’re talking about the triple bottom line as opposed to just the governance piece, the profit, the traditional bottom-line evaluation of how a corporation or any organization functions. But we’re talking about public corporations here because of the influence of the information to their shareholders and decisions made about investments.

But the S and the G components are a huge part of it, and E is just one piece. There are hundreds of these metrics that companies are voluntarily evaluating, quantifying, gathering data, and reporting on an annual basis now.

So, this is a major undertaking that’s trickling through the economy. If you look at any of your favorite corporations, and go online and type in “corporation,” and “sustainability report,” I can assure you you’ll find information about what they’re recording and reporting. I think it’s upwards of 95% of S&P 500 companies are doing a sustainability report these days.

So, when we focus down on the E, and then within E just the air quality piece because remember there are all kinds of environmental metrics that corporations are looking at: water use, energy use, waste generation, bio habitat impacts, all kinds of effects of an organization on the natural environment and, you know, people – emissions.

And the reason we’re talking about the greenhouse gas emission piece, of course, is the SEC focus again and bringing it back to that Scope 1, Scope 2, and Scope 3 emissions. Just again, real quick, the Scope 1 emissions are those that a facility emits itself. The Scope 2 emissions are those associated with the power that’s purchased by a facility, say the electricity being generated by the utility, some distance away. And then the Scope 3 is all these other associated activities upstream and downstream. And, you know, probably the most important thing for companies to do relative to Scope 3 right now is to really understand that value chain. We’ve got these 15 bins that the current gold standard for doing greenhouse gas emission inventories for Scope 3, which is called the greenhouse gas protocol, has defined.

And if you look online and type in, “Scope 3 emissions,” and look for an image, you’ll see a picture that shows the Scope 1, and the Scope 2, and then the 15 upstream and downstream categories. And so, as corporations seek to conform to this new SEC – and again, this is a proposed rule, and no doubt it’s going to change, and who knows when it’s going to become official? But if companies do sign on to report their Scope 3 emissions, that’s the first place they have to start is to understand what the value chain contributions to their greenhouse gas emissions are and are they significant.

Just because there are 15 categories in the protocol doesn’t mean that they’re all applicable to a facility, and even if one is applicable, it may be trivial or insignificant. And companies can certainly itemize them as being zero emissions from a particular category. Say they don’t have any transportation of a product by trucks downstream from their facility. Maybe everything goes in a pipeline, or I don’t know. But there are all these categories that you need to characterize to see if they are significant or not. And that’s really kind of just the tip of the iceberg because think about it.

If you’re a company and you’re purchasing something as a raw material to manufacture a product, what portion of the greenhouse gases associated with that raw material are your responsibility as the user, and how do you apportion that to your operations? It’s a very complicated and challenging question, and the guidance does go through how to do that, but it’s going to be a big lift for companies, I think, to evaluate that and understand that and come up with mechanisms that are, again, consistent and meet the kind of general accounting standards that are being expected of organizations that are publishing information that people are going to make investment decisions around.

Andrew: So, it’s interesting, right? The best thing that clients can do right now is start to look at their value chain, look at their supply chain, go upstream and downstream. But as you look upstream, you may have distributors or suppliers or service providers that aren’t required by the SEC just because they might not be a publicly traded company, might not be big enough, might not have reporting requirements. You’re going to have those companies who aren’t going to be as savvy and aren’t going to have collected that data. And if you’re able to find someone who’s collecting that data, they also need to separate their data for you, as someone who’s downstream, right? So, now they’re no longer just tracking emissions cumulatively; they’re actually tracking it per client, their client being our client who’s receiving those services or goods. So, it seems like it’s going to be a tough road ahead, I think, for the next couple of years. I wonder if you can give us some examples of things you’ve possibly seen in your experience of how just in general, we take a quick step back from specifically Scope 3, in general, how do you see clients applying their ESG strategies now just to help them cope with the SEC future rulings, the uncertainty that they’re facing? Do you see any sort of sweeping trend or anything for clients right now, as they’re trying to anticipate any sort of SEC moves?

Kris: Well, one area that I’ve focused a lot of attention on recently is climate change risk evaluation, climate change risk assessments. And I think that’s an area – it’s actually one component of the SEC disclosure obligation. The three pieces are the greenhouse gas emissions themselves, whether Scope 1, 2, and/or 3, the emission reduction targets that an organization has set, which in general parlance these days, you’re hearing net zero, right? Major corporations are setting goals to achieve net zero. So, what does that mean, and how are they measuring and tracking that? And then the third is the assessment of climate-related risks to their operations. And I find that that’s a pretty fascinating area, and the Intergovernmental Panel on Climate Change, the IPCC, in their assessment reports has focused a lot of attention on that area as well. Because you’re looking at the implications of climate change to the operation and functioning of an organization.

And one of the areas of service that we’ve been asked to provide has to do with assessing potential climate risk to proposed facilities. So, an example would be, or I’ll give you two contrasting examples. We were asked to develop a climate change risk evaluation for a proposed combined cycle gas turbine facility.

So, it’s burning a fossil fuel, natural gas, generating electricity. And the climate change risk assessment process, which is driven by the Task Force on Climate-Related Financial Disclosure, TCFD, is to look at two categories of impacts whether they are physical changes or what’s called transition changes. Transition being what are the societal implications of a transition to a low carbon economy? So, I’ll give you some examples of both. Physical – the physical impacts are easy – extreme heat, like what we’re experiencing globally right now, drought, extreme storm frequency increases, extreme precipitation events and flooding, sea level rise. All of those kinds of things are potential physical impacts that could affect the operation of a proposed facility and investors, especially those who are part of an organization called the Equator Principles. It’s an investment consortium, and they’ve established a procedure, kind of like the SEC procedure, but this is a well-defined approach to assessing climate change risk. So, we’ve used that procedure to provide white paper documentation for the project developer to use to explain to their investment group, “Hey, here are the potential climate risks, physical climate risks, to this operation. Could the potential for drought in the region where this facility would be located affect the ability of the power plant to function?” Because there could be reduced availability of water as a cooling mechanism for its operation. Water being a critical element needed for the facility to operate, as an example.

On the other side, the transition risks are fascinating too because they look at what are societal implications associated with this transition to a low carbon economy, and the most likely one is a cost on carbon. If this combined cycle gas turbine facility, which would be emitting huge quantities of carbon dioxide, suddenly has to pay a fee for those emissions, how does that affect the performance objective of this facility? So, those are two examples of climate change risk assessment for a combined cycle gas turbine.

In contrast, we’ve been asked to look at the climate change risk associated with a proposed wind farm, a green energy project that would be generating hydrogen from the green wind power. So, in that case, we were looking at well, what are the implications of this particular site located, say, on the coast? What are the implications of extreme storm frequency increases that could affect the performance of these turbines because of inundation or sea level, storm surge, or something like that?

Or if one of these facilities was located out in the Midwest and was using groundwater as the supply for the hydrogen electrolysis, well, what happens if there’s drought in the region? Or is that a drought-prone like region? Is that likely to be a consequence of some time into the future? And we’re talking 10 years out, 20 years out, 30 years out. So, there’s a lot of speculation and uncertainty, but that’s the gist of this approach is trying to gauge and provide the investment community with a sense as to how climate change risks could affect their operation. And that’s an integral part of the SEC proposed rule that companies need to be looking at.

Andrew: So, that’s interesting, right? When you touch on resiliency, this goes even further than SEC. The SEC is doing it to help investors, but resiliency is truly part of that. It’s going to help determine whether or not a company or even an industry can grow, right? And that’s valuable information for investors, and regardless of how this scene kind of plays out, it seems to me that tracking and disclosing climate change information will be required or, at least, advantageous to a public company someday, whether it’s this year, next year, five years, 10 years, whatever the case may be. As you mentioned earlier, with the warming trends we’re seeing, I mean, this is real stuff; it’s happening, and a lot of stakeholders, shareholders, customers, you know, we look at that supply chain all the way downstream. We haven’t touched on that too much, but, you know, there are customers that people need to consider as well in public perception. So, all that goes into investment for a lot of these publicly traded companies. So, Kris, let me ask what are some recommendations you would have for some listeners today regarding the greenhouse gas emissions and when you look at tracking and monitoring, reporting, and all that?

Kris: Well, if an organization hasn’t started to look at what their carbon footprint is, I think that now is the time to take a hard look at that, even just from the Scope 1 and 2 emissions perspectives. Because that’s as we’ve seen here, and as we’ve talked about probably the most high-profile aspect of the ESG from the E perspective slash we’ll just call it sustainability strategy for organizations. If they’re proposing or stating that they’re evaluating and operating from a sustainability perspective and they haven’t looked at their carbon footprint, then that’s probably the main gap and the place to start.

So, you know, from the perspective of understanding your carbon footprint, that’s really what – CEC has developed a sort of three-part strategy when it comes to providing sustainability/ESG services to our clients, and that assessment really is where it all starts and enables an organization to then start to prioritize where they are and what their objectives should be. I mentioned earlier the whole net zero. OK. If you don’t have a baseline understanding of your greenhouse gas emissions, then you can’t set any goals to reduce your emissions. You don’t know where you’re starting from.

So, we have clients right now who are seeking our help to establish these baseline emissions and understand their Scope 1 and Scope 2, and probably after that the Scope 3. Establish these baselines, help them define where they are so that we can set goals if they choose to try to align their reductions with the Paris Accord.

There’s a whole category of strategies called science-based target initiative, SBTI, that is aimed at aligning an organization’s emissions strategy with the Paris Accord, 1.5 degree C approach. But, again, the greenhouse gas emissions are just one piece. Water is critical, waste generation, anything that’s using energy is all related to, you know, emissions too, ultimately, anything that’s using a fossil energy, obviously. But, so, through that assessment of kind of where we are right now, then you can start to say, OK, well, what are the vulnerabilities? What are the opportunities? And what do we need to do to position ourselves for, say, being more resilient, as you mentioned, or adapting to climate change, whether that means to build a sea wall, to protect a facility from a storm surge or from a river that potentially could flood more frequently in the future and wipe out an industrial operation, which we’ve had an opportunity to support?

And through that engineering phase then organizations become more resilient. They understand what the risks are. They can adapt and understand both the sensitivities and weaknesses and vulnerabilities, as well as opportunities in the supply chain, both upstream and downstream, and where they can collaborate with other value chain partners and build resilience.

Then it finally gets into sort of the reporting out to your constituents, and that’s the climate change – I mean the sustainability reports that companies are preparing, and then reimagining or envisioning further change or further opportunities to innovate and improve. So, that’s our kind of process. And I think that the ESG process serves as a good roadmap to help organizations prioritize their risks and take meaningful action toward long-term sustainability for their organizations, their communities, and essentially for the global environment.

Andrew: That’s an interesting point you just brought up with net zero in monitoring and measuring, right? Because if you wanna figure out where you’re going, you need to know where you’re at and where you’ve been, right? And I know you’ve said it before, “What’s measured gets managed.” And if you need to worry about something being managed in the future or something from an agency like the SEC telling you you need to manage something, well, then it needs to be measured; you need to start looking at that. Kris, thank you for being on this episode of CEC Explains. For more information on sustainability, please visit cecinc.com, and check out some of our articles and previous podcasts. Kris, it’s been great talking to you, and I think we can look forward to an update in the future.

Kris: Absolutely. Thanks very much, Andrew, for organizing this and I will look forward to it.

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