California just forced the corporate hand on Scope 3 reporting

Last week I predicted that companies would soon have to report Scope 3 carbon emissions. On Friday, the state of California put an exclamation mark on that issue. It’s perhaps the biggest climate news this week, despite New York Climate Week taking place on the other U.S. coast, on the sidelines of the U.N. General Assembly meeting.

Under a new Golden State law, any corporation active in California with over $1 billion in global sales will have to disclose its indirect CO2 emissions as of 2027. The rule applies to some 5,000 companies, whether they are public or privately held. Because of its scope and reach, the law seals the debate on Scope 3 before the Securities and Exchange Commission has even made up its mind. (Gov. Gavin Newsom said this week he will sign the bill into law.)

What does it mean for climate action and accountability going forward? First, let’s review the three levels of emissions:

Scope 1 emissions come from a company’s own operations, like burning oil in a production process.

Scope 2 emissions are from purchased energy, like when a company buys electricity off the grid.

Scope 3 emissions are indirect, including those coming from the use of sold goods.

Measuring Scopes 1 and 2 emissions is relatively straightforward, as large companies usually know the emissions that come from their own operations, as do the energy companies they buy their electricity from. As a case in point, at the cement factory I visited this week, the plant manager detailed its CO2 emissions.

But can you measure your Scope 3 emissions?

I’ve spoken to quite a few business leaders over the past year about that challenge, and their answers were all over the place. The SEC also encountered this challenge when it put its draft emissions disclosures up for feedback: 16,000 companies and associations responded, with wildly differing views on the ability to measure Scope 3.

To a certain degree, that’s understandable. Depending on the industry you’re in, Scope 3 emissions can be 10 times your Scope 1 and 2 emissions. Think for example of a car company like GM: All the gasoline burned while customers drive their cars count as Scope 3 emissions. Or a retailer like Walmart, whose thousands of suppliers have emissions that count too.

In California, as in Europe before it, lawmakers have now determined that yes, we can ask companies to disclose their indirect emissions. It’s also the view of one of the California bill’s cosponsors, Ceres, a nonprofit sustainability lobbying group that works with some of the largest companies and investors on climate action. “It’s feasible. It’s possible. It’s not easy, but it is very doable,” Ceres CEO and president Mindy Lubber told me from New York.

According to Lubber, some 20% of the largest companies in the U.S. already measure their Scope 3 emissions. And the World Resources Institute last year that estimated that up to 7,000 companies from around the world already report their Scope 3 emissions. (It also found, however, that U.S. companies were less likely to report them than their global counterparts.)

I’m neither an ESG accountant nor a chemical engineer. But when I was working at consulting firm Bain & Company more than a decade ago, we were making Excel files with estimated direct and indirect emissions from things like our air travel and car usage. Ten years and a data revolution onwards, it’s hard to imagine anyone couldn’t measure their Scope 3 if they tried. In fact, GM and Walmart prove the point: They both voluntarily measure and disclose their Scope 3 emissions.

In my reporting, I’ve also found that a great litmus test to assess a company’s true commitment to the green transition is to see where they stand on Scope 3 emissions reporting. You can find most companies’ feedback on the SEC draft climate disclosures here. Chevron, Walmart, Microsoft, Alphabet, MSCI, and BlackRock are among those that publicly support Scope 3 emissions disclosures, so I take their green transition programs more seriously out of the gate.

But companies have other good reasons too, to disclose their Scope 3 emissions: “It will go a long way to both allow companies to integrate their climate risk and act on it, and allow investors to make smarter decisions,” as Lubber put it to me. “It’s an old saying, but what gets measured gets managed. Until you aggregate the data, investors might not know the full extent of the risk, and they ought to.”

More news, including from this week’s Climate Week in New York, below.  

Peter Vanham
Executive Editor, Fortune

This edition of Impact Report was edited by Holly Ojalvo.