Companies may soon have to reveal their carbon emissions

This story was originally published by Wired and appears here as part of the Climate Desk collaboration.

In 2020, Microsoft decided it wanted to be “carbon-negative” by the end of the decade — to remove more greenhouse gases from the atmosphere than it produces. That first year, it started on the right foot; emissions fell six per cent. But in 2021, the pandemic had a strange side-effect. The company’s Xbox One X was selling in droves, and stuck-at-home gamers played a lot more than they ordinarily would. That affected Microsoft's bottom line — for carbon.

The company estimates the console produces about 1,600 pounds of carbon emissions over its lifetime — some of that from the process of making the machine, but the vast majority simply because gamers are plugging into a dirty electricity grid. Along with factors like data centre construction and equipment making, many thousands of hours of Call of Duty: Warzone were one big reason why last year Microsoft’s overall emissions spiked more than 20 per cent.

Calculating a company’s responsibility for emissions has always been tricky. Companies use energy and produce greenhouse gases directly, of course — by operating offices and data centres, making products, and converting carbon-absorbing wilderness into wasteland. No arguing with that. But then there’s everything else: the suppliers who make the widgets for their products or construct new buildings, the raw materials extracted from mines, the vast global shipping networks. They all pump out carbon, too. Plus, businesses have customers whose energy use goes up when they buy a new computer or switch on that Xbox.

A few companies, like Microsoft, count up all those emissions and voluntarily publish the results. Most, despite splashy goals to cut emissions, don’t.

The U.S. Securities and Exchange Commission wants to change that. Recently its commissioners proposed new rules that would require public companies to start laying out all of their greenhouse gas emissions — not just those they spew themselves, but all the carbon required to keep their businesses running. For the first time in the U.S., this would create a standardized disclosure of every publicly traded company’s carbon footprint, to be delivered to investors regularly.

The rule isn’t final yet — there are two months of public comments ahead, and plenty of pushback is expected on where to draw the line for what emissions a company is responsible for and what standards to use. But the SEC wants to go broad. Its rationale, in a word, is risk.

Climate risk is often thought of as physical risk: Perhaps your factory happens to sit near a failing seawall or a wildfire zone — or maybe it could be soon due to rising seas and temperatures. The SEC unsurprisingly wants businesses to disclose that kind of risk.

But there’s a second kind of risk that stems from the very act of emitting carbon. In its purest form, that sort of business risk might appear as a tax on carbon emissions. But as the tide shifts toward addressing climate change, there are all sorts of other factors, from legal challenges and restrictions on emissions to changes in technology and customer preferences that will endanger oil-burning businesses. That’s called “transition risk” in sustainability consultant-speak. The amount of carbon a company emits is a proxy for it. And requiring disclosure of this type is a little more revolutionary.

“What I like is that they have given special importance to emissions,” says Gireesh Shrimali, a Precourt Scholar studying sustainable finance at Stanford University.

Requiring companies to disclose transition risks is a long time coming, says Alexandra Thornton, who leads tax policy at the Center for American Progress, a liberal think tank. Many companies have already started considering physical climate risks — because, duh, they’re a real and present danger to their bottom lines, causing billions of dollars of damage every year.

Many also report their emissions, keeping tabs on progress toward publicly stated targets. But they vary in their methods, accuracy, and just how much companies are willing to reveal. The SEC’s point is to standardize what companies report and perhaps unearth concerns that execs only calculate and worry about in private. That way, investors can decide for themselves if a company is making a risky gamble on a carbonized future. Maybe that will force them to do better. “If you measure something, you manage it,” Thornton says.

Right now, much of that measuring is done through a set of guidelines called the Greenhouse Gas Protocol. It divides emissions into categories: So-called Scope 1 emissions include the emissions a company produces itself, while Scope 2 tallies the emissions from producing the energy it uses — perhaps released by a distant coal plant, but still integral to the business. Scope 3 covers everything else, from vastly complex supply chains to the energy demands of customers to emissions from the cars that employees drive to work.

For most companies, “Scope 3 is by far the largest share,” says David Rich, a senior associate at the World Resources Institute, a non-profit that developed the protocol.

They’re also generally the most stubborn to get rid of. Big companies can often wind down their Scope 1 and 2 emissions with relative ease — put solar panels on headquarters, maybe, or use their status as major energy buyers to transition their electricity-hungry data centre from fossil fuels to renewables. It’s not so hard if you have a lot of money and influence.

But Scope 3 emissions sprawl beyond the grasp of those companies — they may depend on customers they don’t control, or be hidden at the periphery of their supply chain where relationships are more tenuous. A company can make positive changes. Microsoft, for example, is now offering a low-power standby mode on its Xbox — but it can’t necessarily tell its users how to behave or tell its suppliers what to do.

“This serves as an important reminder that Scope 3 emissions are the most difficult to control and reduce,” CEO Brad Smith wrote in a statement accompanying the company’s annual environmental report, noting that emissions from the other two categories fell by 17 per cent. (In response to an emailed inquiry, a Microsoft representative directed WIRED to the company’s report and product lifecycle documents.)

From pharmaceutical companies to tech firms, that’s the pattern: big progress on the first two categories, along with steady increases in Scope 3—which just so happens to dwarf the others. But most companies simply don’t report Scope 3 emissions at all.

One reason, apart from the bad optics, is that they’re harder to count. Take the supply chain for something relatively complicated, like a laptop. First, you’ll go to your trusted suppliers and ask for their carbon accounting — the companies in China that make your screen, casing, and electronic innards, like chips and processors. That’s not so difficult. But what are the Scope 3 emissions of those manufacturers? And what about their suppliers? And the suppliers that supply those suppliers?

“It’s an exponentially exploding problem,” Shrimali says. “Eventually you hit a brick wall.” At that point, the only option is to estimate. Maybe you can’t get good numbers from the mine that extracts the boron for your shatter-resistant screen. So you look at averages for boron mining. But that’s not a great solution. What if your company is relying on a particularly dirty boron source?

Those assumptions may appear small, but they go a long way. For example, what if an automaker is just a tad conservative about how many miles it expects customers to drive each year? Land use emissions involve particularly large uncertainties, because scientists simply aren’t sure yet about the exact amount of carbon storage that’s lost when forest biomass goes away or healthy soil gets stripped for farming. So it’s hard to pin down the carbon impact of some raw ingredient deep in a food supply chain — and that gives companies plenty of wiggle room to underestimate. (The Greenhouse Gas Protocol is planning to release land use standards later this year.)

There’s a phrase for this: “carbon washing.”

With complexity comes choices, and the option to cherry-pick data or use conservative estimates to show lower emissions. Take a company like Amazon. As Will Evans of Reveal reported earlier this month, the company’s voluntary report includes full Scope 3 emissions for the Amazon-branded products it sells, which account for about 1 per cent of the company’s sales, but not for other products sold on its platform. The result is a smaller carbon footprint than Target, a much smaller retailer, which accounts for all the products it sells in its annual environmental report. (In a statement, spokesperson Luis Davila wrote that the company expects large brands to “account for the carbon of those products in the same way we account for the full lifecycle footprint of our own private-brand products.”)

Opponents of the SEC’s proposal point to this complexity and say the requirement is both burdensome and not likely to be very informative. Business groups including the U.S. Chamber of Commerce and the U.S. Oil and Gas Association have lined up to rein in the rules, the latter accusing the SEC of “mission creep” by declaring emissions a financial risk to investors. Others have homed in on Scope 3 emissions. The U.S. Flexible Packaging Association wrote that supply chain emissions “are just completely out of a company’s control or ability to authenticate.”

Hester Peirce, the sole SEC commissioner to dissent on the proposed rule, called it a “gift to the climate-industrial complex.” And it’s probably true that the requirements will be a burden for some smaller public companies, Shrimali says, which don’t have an army of consultants at their disposal to investigate their supply chains.

But if the aim is to reduce those burdens, the SEC requirement may be the right step, Shrimali says. Under the current proposal, Scope 3 will apply only to the biggest companies starting in 2025, a year after they start reporting Scopes 1 and 2. The smallest companies won’t have to report them at all. And many big companies are already doing that full analysis, even if they’re not sharing the results publicly or fully. Shrimali’s main concern is that the current guidance doesn’t do enough to force companies to adhere to specific standards and seek independent audits of their data — but he hopes that will come later. Companies should have to explain why they exclude certain pieces from their emissions calculations and how they come up with estimates. The burden of proof should be on the corporation.

Collective action should make the carbon accounting process easier. After all, one company’s Scope 3 emissions depend on the direct emissions of the companies it does business with. So if everybody starts reporting emissions, getting the full picture would be easier. “It’s a networking problem,” Shrimali says. “You could write it as simple code.” (A number of startups are already lining up to do it with artificial intelligence.)

Right now, there are huge chunks of information missing, including emissions data from suppliers in China and India — and, of course, most companies in the U.S. The SEC’s move will be an important step toward filling in that gap.

“This rule is not going to solve the climate crisis,” says Thornton. “But it’s a starting point.”