SEC-regulation proposal: How to see it as a business value

This article is sponsored by Makersite. 

The United States Securities and Exchange Commission (SEC) has encouraged companies to disclose their climate-related risks since 2010. However, publishing this data has been voluntary, making it easier for companies to either avoid it or palliate their data and many have especially when stating ambitious net zero goals. With its newly proposed regulation, the SEC takes a big step towards more accountability and transparency in the market.

Why is the SEC taking this step now?

Sustainability experts have claimed that regulations are inevitable and imminent for the last two decades, but they’ve always been “just beyond the horizon.” Now that this horizon is finally here, it’s clear that wherever regulations have not been established yet are soon to come. Most likely, they will be based on the sustainability regulations that Europe and the United States are putting up right now. This is on the backdrop of the majority of countries signing the Paris Climate Accord and an increasing number of countries setting net zero targets between now and 2050.

What does this development mean for you?

While many businesses must comply with the new regulations, it will be the hardest for international ones. The good thing, a lot of leading enterprises have had sustainability initiatives for decades; others have already adapted their business or are in the process of adapting it to a net zero future.

The past has shown that using climate change as a force to innovate is an unprecedented opportunity. There is great attention from customers and investors for companies that drive innovation. Meaning the regulations and the general awareness can bring your company business value. But if you see the business value or not: The upcoming regulations will force companies to report on and mitigate their environmental damage.

What should you be doing now?

What you should do depends significantly on where you are as an organization.

If you are an early adopter, chances are you already have an established program, and you’re probably basking in the limelight now. Enjoy it! You are beyond the initial phase of estimations, hot spot analysis and average data that drive reporting and management in the company.

What you should be looking for is to do two things.

1. Find deficiencies in your current process to enable you to scale what you’re doing.
2. Use what you’ve learned so far to enable meaningful change within the company by integrating into the core engines of the business, namely procurement and engineering. You will also probably be looking at a technology change that will enable you to make this next step, focusing on capabilities that will allow engineers and procurers to make sustainable decisions with ease. This way, you’d broaden from a purely sustainable view to the real-world multi-criteria view that decisions are based on.

If you’re only at the beginning of your sustainability program, you belong to the average majority. There is much catching up to do, but luckily, you’re not trying to reinvent the wheel. As a manufacturer, the most crucial factors for deciding your approach are the product and supply chain data available within the business: Who do you rely on for this data — procurement or product engineering? The greater the maturity of the bill of material information within the company, the more you would lean towards a lifecycle-based approach. This is preferred, as opposed to a spend-based approach driven by procurement data (find more information about the advantages of these approaches here.) Your procurement and product teams are your critical stakeholders for data and reduction initiatives. Determine what they need and how they would like to receive that information. Speaking to sales about priorities will help you develop your roadmap of first successes and get commitments to budgets.

How do you get on top of the challenge?

Up to 90 percent of environmental impacts are hidden away in deep supply chains for most manufacturing companies. In the worst case, you would need to investigate emissions from 21 tiers of your supply chain to cover 90 percent of your emissions. Why? It’s an empirical calculation. If every supplier only knows about 10 percent of their emissions (Scope 1+2) and 90 percent of emissions of every company/supplier comes from the supply chain, you’d have to go 21 tiers deep into your supply chain to cover 90 percent of your emissions in the worst case. Even in the most optimistic scenario, you must dig into at least four supply chain tiers. While that doesn’t sound too much initially, this is a herculean task even for the most advanced supply chain teams, as more than 65 percent have no idea what is happening in their tier 2 supply chain.

Therefore, quantifying your impacts on the environment and providing the ability to make meaningful change through existing processes and teams within your organization is impossible without help. Tools are invaluable for saving time, increasing credibility for auditors, and most important, critical to enabling change within the organization.

Solution providers fall into three groups. Consultancies report manually with internal tools, mainly using a lifecycle-based approach, while software solutions report automatically. Most of the software on the market takes a spend-based approach to calculations. That means they’re estimating the emissions by collecting data on the economic value of the purchased goods and services and multiplying it by industry average emission factors. Makersite is currently the only solution that enables a hybrid approach — a fully automated solution that uses a life cycle approach where the bill of material data is available and a spend-based approach where it isn’t. The more granular your data, the more actionable the insights will be. This way, Makersite automatically reports on all 15 categories of Scope 3 and simultaneously identifies reduction levers, forecasts target achievement, and equips business stakeholders like procurement to take action.

Why is this important? Emission reporting is the easy part. Meaningful change can only be made once you get actionable insights into your product data and supply chains. Allowing real change means more than showing possibilities to be more sustainable. It also means that you need to be able to evaluate these possibilities on other levels like cost and risk.