Are you tracking Scope 3 Emissions
Increased regulatory requirements may mean you will need to develop the ability but increased competition for investors with ESG goals may mean you will want to master it.
The SEC proposed rules on climate change disclosure have rightfully ignited many conversations amongst publicly reporting entities, including REITs. Perhaps one of the most challenging requirements of the proposed rule is the inclusion of Scope 3 emissions if material.
On its surface, this may seem to be just something else you have to do or figure out if you need to do, but in Commercial Real Estate, we tend to use the “operational control” approach to defining our emissions. Essentially, this means our Scope 1 and Scope 2 emissions are those that we “have the ability to introduce and implement operating and/or environmental policies and/or measures.” You might think of this as “who controls the thermostat?” If you control the thermostat, if you control the lighting, then you essentially have operational control, and the emissions from the energy associated with that asset are your organization’s Scope 1 (direct – typically onsite consumption of natural gas) or Scope 2 (indirect – typically electricity that is produced offsite). In addition, fugitive emissions that originate from the site are Scope 1 emissions – such as refrigerant leaks. (GHG Protocol Guidelines)
If you don’t “control the thermostat,” – you don’t have operational control, and thus your ability to control the energy use is restricted. These emissions are Scope 3 emissions, sometimes called value chain emissions. In addition to the energy used but not controlled by the owner, this is also where we see emissions from landfill waste, employee commuting, and emissions from construction materials used in new construction or major renovation. These are emissions that the owner has some influence over but not operational control over. In Commercial Real Estate, 85% of an owner’s entire footprint is typically Scope 3 emissions, so it is a material amount and potentially may require reporting under the new SEC’s proposed rules on climate change disclosures.
But why might you want to report Scope 3 emissions anyway – even if you are not required to by the SEC guidelines?
Reporting Scope 3 emissions assumes that the organization is taking a closer look at its impacts on climate change and ultimately may help identify hotspots and prioritize emission reduction efforts. Doing so demonstrates to stakeholders the environmental stewardship of the reporting party and can enhance the organization’s reputation by identifying risks and opportunities. There can also be reduced operational expenses associated with managing Scope 3 emissions as the entire supply chain can be managed for efficiencies. In addition, those tenant area expenses become owner expenses during turnover or vacancy. Working with the supply chain more closely provides additional opportunities for innovation and collaboration, building the supply chain into a “Value chain.” When you work more closely with your supply chain, supplier experts can improve the organization through knowledge sharing, innovation, compliance awareness, and opportunity identification.
In addition, organizations that track Scope 3 emissions tend to have higher tenant or resident engagement levels. Tenant or resident engagement can lead to increased tenant retention and the same kind of partnership collaboration with tenants or residents that is enjoyed by increased collaboration with the supply chain.
Let’s think about this from an investor perspective. Your fund is attempting to attract capital, and you need to lay out why that capital should come to your fund versus others. Investors are looking to mitigate risks – which requires understanding what that risk is. A fund that discloses Scope 3 emissions has a more complete understanding of its impacts and an advantage over those that do not. Not only can additional risks be identified and mitigated, but additional opportunities for investors may also be identified. With Scope 3 disclosure comes increased differentiation and improved performance in rankings regarding sustainability indices and frameworks.
That is not to say that developing a more comprehensive greenhouse gas inventory will be easy; Scope 3 is notoriously more challenging data to collect. By definition, Scope 3 emissions are beyond the organization’s direct ability to control, yet they remain under their responsibility and can be influenced through several different strategies. This is especially true for larger and more complex organizations. To address the ESG professional must be prepared to deal with competing cultural, legislative, and practical variables. It may also require tradeoffs, particularly further down the value chain.
Amongst the most challenging and complicated factors is that of data collection. Control over the data may fall to multiple stakeholders, which the ESG professional must coordinate under circumstances over which they have little direct control. The key is developing the skill of influencing without authority, which is the strategy I want to dive deeper into this week.
Influencing without authority requires building credibility and trust. This requires finding common ground, “speaking” the language of the stakeholders, and building the case that this is in their best interest. Sometimes we can build this into the leasing process, in which the tenant or resident provides consent to share data as part of the lease, sometimes referred to as green leasing. I have dove deeper into this topic in other posts. Still, a key stakeholder in this process that must be considered in addition to the leasee is the utility provider, who may resist or even refuse to comply with an executed LOA. This is where partnering with a very experienced utility management company can provide some relief. Their experience and scale can potentially open doors that the property owner alone cannot.
The second key to influencing without authority is mobilizing your allies. No matter how big or small your goal is, you can’t influence your organization without a solid network of allies. Finding alignment with allies can provide emotional and practical support and offer additional perspectives on how to potentially approach the issue at hand.
Speaking of the issue at hand, to influence without authority, you need to not only find common ground with whom you are attempting to influence but also learn what areas are non-negotiable. There is only one way to accomplish this, listening to whom you are attempting to influence. Less talk, more listening – and a little empathy while doing it will not hurt either. Humility and a willingness to learn from others will go a long way, and what you learn from others could enrich your perspective.
With a better understanding of who you are trying to influence and what motivates them, we weave in the ability to tell a story. You read that right; storytelling is one of the most essential skills for an ESG professional. Our secret weapon – our passion. Leveraging our passion around ESG can pull who you are trying to influence into the story. That story is relaying why they want to help you and why your ESG goals are aligned with their goals.
An old Stephen Covey habit speaks to this entire process, the habit of listening to other people’s ideas and feelings. Trying to see things from their viewpoints. That habit, “seek first to understand, then be understood.”
You can help reduce the impact of the built environment by sharing this blog with your peers. Together we can impact the 39% of greenhouse gasses attributed to the built environment. It starts with awareness, and we succeed with teamwork.
Stay well!
Chris Laughman is the ThirtyNine Blog author, a blog dedicated to reducing the impact of the built environment. When not blogging, Chris is helping the real estate industry reduce energy and water impact as the Vice President of Sustainability for Conservice, the Utility Experts. Whether Multifamily, Single Family, Student Housing, Commercial, or Military, we simplify utility billing and expense management by doing it for you. Our insight into your utility consumption provides an opportunity to identify risks. Leveraging innovation and experience we ignite solutions with real impacts and track performance to ensure the trendline stays laser-focused on the goal. At Conservice we have developed a true bill-to-boardroom solution to help truly make a difference. We have before us a tremendous opportunity. Standing shoulder to shoulder, we will get this done. Contact me at claughman@conservice.com for more information.
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