It’s the supply chain, stupid.
Reflecting on my first week joining the Rio AI team, I had the opportunity to get into the market at the Retail Supply Chain & Logistics expo. Over my career I have worked with large multi-national, 10 billion plus revenue businesses, watching sustainability trend from lip service to board room agenda item one. Out of consulting and into sustainable tech, a lot of the conversation seems to be continuously worried about the politics, division and even lately, what we should be calling it.
With the SEC rule announced this week, many sustainability practitioners in the worlds largest market possibly feel disheartened, concerned and disappointed. Why? What does it matter if a, "regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the US' securities markets", does not require those very companies to report on their scope 3 emissions? Do we all agree what Scope 3 even is (bro)?
As over 3000 companies (finally) come online and begin to disclose the material combustion from their direct carbon emissions – in offices or factories, from their vehicles, engines, generators or fleet, and also the type of energy they buy from the grid (renewable or non-renewable) we should all be celebrating. Not only are our American cousins playing catchup to Europe (and even China), they are wisely coming to terms with the well known fact – that it is, the supply chain, stupid!
The CDP graph outlines that across most sectors, 90% of GHG emissions come from Scope 3. From speaking to over one hundred businesses in my two days at the ExCel in London, it was obvious that this group of businesses are by and large that very segment. They are the suppliers of a business’ materials, the transporters (or fleet) of the deliveries, the packaging of the products, the people behind the a to b, the designers of the imagery helping the sale, among many, many vast yet extensive small to medium sized enterprise. They are the freight, the planes, trains and automobiles. Businesses with revenues from £50k to £50 million, headcount of 1 to 10,000, floor area covering a rented office to 300 locations in a dozen countries. It is a beautiful jigsaw, of how stuff gets done. They also remain the question mark for GHG emissions. This group are for all intensive purposes, a material portion of the supply (and value) chain, or what we ended up calling Scope 3 - everything else.
Thinking more about those CEOs, MDs, Head of Sales that I met pushing their brands, their number one principle was: cash is king, liquidity matters, our investors, customers and b2b or b2c relationships live by the day, week, month and if lucky year. They were also certainly not a fossil fuel villain, and had a consistent view that while sustainability matters, what do I do, how can I do it, when and why? It starts with GHG emissions, yes. But they don’t know what that is or means to their business. The enterprise dilemma is to have a number that is defensible, credible and meaningful to stakeholders. GHG's are undoubtedly an emerging priority currency to focus on (and it's not the only material one) but this cannot come at a cost to their number one principle. I cannot disagree, we are all trying to make a living, no matter what we do.
So perhaps the SEC is not remiss, but right by not mandating overnight for indirectly hundreds of thousands (if not millions) of these businesses to comply with a subject matter they know nothing about. Many governance, risk and compliance SaaS companies have been working with this group for decades, trying to increase accountability and transparency. Effort has focused on anti bribery, corruption, money laundering and modern slavery to date. GHG emissions is emerging recently to join this focus, but while it is a nascent subject, the focus should be gradual. The SEC rule is sensible because it will table the importance of GHG emissions accounting, without pretending there is a quick fix to getting quality data. "Emissions co-pilots", "Navigators", "Exchanges", "Buttons", and, "Leavers", join "Target Operating Models" in the trash heap of stupid gimmicks that will achieve nothing valuable over the long term. We need to give this group of SMEs, these suppliers, a sensible methodology to measure their direct emissions and account for it annually, whether being asked for it today, or tomorrow. The price these companies pay for services to get going cannot be in the high millions, or even tens of thousands. It must be proportionate to their operations and the concept of materiality.
As I always came back to in my diagnosis to understand how Rio AI can help their business, “do you use Xero or SAP?”. The size and scale of your business will drive the amount you pay for SaaS, that can help you calculate the true cost of (not just carbon, but) sustainability.
My opinion is that having seen over ten years of large conglomerates listed on the London Stock Exchange comply with the UK Companies Act (ten plus year’s ahead of this SEC rule) I think it could possibly take one decade for those US SEC filers to get authentic, auditable disclosures for their Scope 2 emissions alone. Even to get there will likely require a lot of (potentially heated) phone calls to PG&E, SCE, FP&A, Edison, Georgia Dominion, made by sustainability managers, auditors and accountants. Only the manually trained sustainability accountant knows the pain of confusing a GWh with a KWh, a comma instead of a full stop, an extra zero with a ten, perhaps a merger or acquisition gone unaccounted for. When that dust is settled, and even if it takes four more years, I remain optimistic the supply chain will have been able to afford and install a sustainability platform that helps them meaningfully measure, manage and report on their data.
Rio is an AI-powered sustainability management platform helping global businesses and governmental organisations to understand and improve their environmental and social impact. We believe sustainability is simply a better business model - helping you operate in a more resource efficient, responsible and profitable manner. Book a demo today.
