The SEC Wants More Climate Data. Digital Solutions Can Build on That Goal.
The US Securities and Exchange Commission (SEC) recently released a proposed climate disclosure rule requiring all publicly traded companies to report greenhouse gas (GHG) emissions and climate-related risks in financial disclosures. If approved, the SEC’s groundbreaking proposal would take a crucial step forward in making climate information and GHG data available and accessible to investors and financial institutions. It would also allow for a more comprehensive assessment of the financial risks linked to projects and operations. The climate crisis poses global and systemic financial risks, and the SEC is rightfully exerting its influence to align market incentives and demands with a 1.5°C future.
Although the SEC’s proposal advances progress on the investment analysis front, concerns remain about companies’ ability to accurately track and report all their GHG emissions — particularly their indirect, or “Scope 3,” emissions — across supply chains.
RMI is developing Horizon Zero to solve that visibility problem and provide the technological engine to support the SEC’s goals. Horizon Zero is standardizing carbon accounting methodologies and building a blockchain technology infrastructure to trace all GHG emissions from the extraction of raw materials all the way to finished products. The project aims to create climate-differentiated markets that allow financiers to understand the climate impact of their investments and enable corporations to create procurement policies and operational efficiencies that align with announced climate goals.
A Unified Vision for Emissions Accounting and Visibility
Increasing access to trusted primary climate data (as opposed to self-reported disclosures) is a fundamental step toward addressing supply chain emissions, but it currently poses several challenges for companies looking to comply with disclosure requirements. Horizon Zero builds on the SEC’s intended goals by addressing these challenges in three distinct areas:
- Incentivizing corporations to report primary data rather than relying on life-cycle assessment (LCA) databases or sectoral averages, which will increase the visibility of emissions and allow for more accurate reporting. The transition to primary data will be gradual, using a “scoring” approach that is being developed in partnership with other leading efforts in the space, such as the Pathfinder methodology, which RMI supports through the Carbon Transparency Partnership led by the World Business Council on Sustainable Development (WBCSD).
- Creating carbon accounting principles that are standardized within each sector and common across sectors. This includes defining fixed boundaries for common processes, such as steelmaking, which would result in a single emissions number stemming from a specific process, rather than splitting that number into “scopes” depending on the perspective of an individual player within that supply chain. This will ensure comparability of GHG emissions profiles.
- Tracking and transparently tracing emissions by using blockchain to digitize emissions data, making it easier for companies to collect and report their data and comply with proposed rulemaking. When each emission is defined with a unique “digital twin” it becomes possible to use a blockchain to allocate and track it, without the need for central transaction registries, as the product associated with it exchanges hands — and transforms — through a supply chain.
Through these three focus areas, Horizon Zero aims to create standardized markets for low-carbon products and accelerate supply chain decarbonization.
Digital Solutions Can Revolutionize Emissions Tracking
While the SEC’s rule would make disclosing climate-related risks a requirement, reporting methodologies for value chain emissions should be made uniform for the rule to be effective.
Although many businesses already share information on their GHG emissions with investors, reporting practices and carbon accounting methods between companies and within sectors can vary tremendously. An overwhelming majority of companies currently report emissions based on the GHG Protocol’s methodology, which lacks the necessary granularity to, for example, allocate emissions to products as they get transformed through the various steps of a supply chain. While sector-specific methodologies for accounting are available, these approaches are not standardized, making it difficult for buyers to compare data. Loose guidelines on “materiality” and Scope 3 reporting, together with the requirement for much of this information to be audited, pose additional challenges for companies with large, complex supply chains.
Horizon Zero will make emissions data more visible and traceable, evolving beyond traditional reporting systems that use estimates and emissions factors and transmit them from one actor of the value chain to the other, which often entails high coordination costs and introduces inaccuracies. While it is still necessary for actors to provide their information, the decentralized landscape of Horizon Zero allows for more participants to provide and access information at once.
As the SEC collects input on its proposal, Horizon Zero is poised to create a reporting infrastructure that is consistent and comparable, filling gaps created by current reporting practices. We encourage SEC leaders to engage with the Horizon Zero solution to improve the visibility and accuracy of supply chain emissions data and the climate risks associated with those emissions.
