California’s SB 260 and SEC Tackle Scope 1 Emissions

California is once again leading the way in reducing companies’ Scope 1 emissions and bolstering their environmental sustainability and corporate sustainability initiatives. SB 260 recently passed through the California senate, addressing all three scopes of emissions. What is most important to refrigerant tracking and HVAC/R operations, though, is its effect on scope 1 emissions reporting.

We are also seeing movement on Scope 1, 2, and 3 emissions at the federal level from the SEC. On March 21, they will be holding an open meeting on whether these emissions will need to be disclosed to investors along with standard financial information.

With all of this movement, let’s dive into what this means for disclosure in the HVAC/R space.

Scope 1, 2, and 3 emissions – direct and indirect emissions

First, though, we need to define what scope 1, 2, and 3 emissions are as they relate to industrial processes.

Scope 1 emissions are direct greenhouse gas emissions that occur from sources that are part of a company’s own operations. This includes emissions associated with sources owned, such as fuel combustion (including mobile combustion), furnaces, gas boilers, refrigerant gases, and cooling consumed. In short, they are direct emissions that a company produces.

Scope 2 emissions are indirect emissions. Scope 2 emissions include anything purchased, including purchased energy such as purchased electricity, steam heat, waste disposal, and acquired electricity. They also include corporate air travel and business travel, emissions from vehicles owned (including electric vehicles), and employee commuting.

Scope 3 emissions are still indirect emissions, but they are a bit more nebulous. They include any indirect emissions not covered under scope 2. Scope 3 emissions can include transportation and distribution, processing of sold products, leased assets, franchises, and investments.

All scope emissions provide an overview of a companies’ total emissions. What concerns us most in the HVAC/R industry, however, are not the downstream emissions (Scope 2 and Scope 3), but Scope 1 emissions. They are what we have the most control over when it comes to environmental impact and GHG accounting.

 

SB260 Fights Carbon Emissions

So how does SB 260 relate to Scope 1, 2, and 3 emissions?

For the first time, it would put into law that reporting on these scopes of GHG emissions are required for certain companies. We see more information about fugitive emissions and other indirect emissions in corporate reports, but SB260 would be the first time this reporting becomes mandatory.

What the bill states

As it is written now, SB 260 would require that starting in 2025, companies with at least $1 billion in revenue would need to publicly disclose to the Secretary of State all of a companies’ Scope 1 emissions, Scope 2 emissions, and Scope 3 emissions each year. These will have to be stated in GHG protocol standards, be easily understandable to the public, and be verified by a third party, such as another reporting company or auditor.

These disclosures will then be used to create a report by the Secretary of State. It will explain the best reasonable estimate of the required annual aggregated greenhouse gas emissions levels of reporting entities that would be necessary to maintain global temperatures within 1.5 degrees Celsius of preindustrial levels using Science Based Target Initiatives (SBTi). It will also include an estimate of the projected greenhouse gas emissions from companies for the calendar years 2030 and 2045. This report will be digitally available.

The bill specifically states that it is putting these requirements for GHG reporting in place because they believe that the plight to reduce emissions, including greenhouse gas emissions, is necessary for the health of California’s people. As stated in the bill “The only way to protect the health and safety of Californians from climate impacts and ensure the sustainability of our communities, particularly those communities most affected by the negative effects of climate change, is to drive down global greenhouse gas (GHG) emissions that impact Californians’ health and California’s natural environment.” There’s no mistaking it – tracking significant carbon emissions in companies and the supply chain is ultimately for the benefit of the environment and to process emissions correctly.

Industry Impact on Greenhouse Gas Emissions

Even though this bill is only for one state, the size and scope of California are big enough to have substantial impacts on the industry. Stephen Lee at Bloomberg Law estimates that this will affect at least 5,200 private and non-private firms. This includes some of the biggest companies in the country, including Amazon, Apple, Alphabet, Chevron, and Facebook. See the chart below for an idea of who is included in this.

While some of the companies have already been putting out ESG reports, SB 260 transforms these documents from highly-encouraged documents to required documents. Companies can no longer hide behind estimates for reporting their carbon footprint. They must do so accurately and report it to a government entity.

Following a Larger Trend

Even though these types of disclosures were not required by a government entity before, we have been seeing the need for fugitive emissions reporting, including Scope 1 emissions reporting, increasing in recent years. In fact, many companies committed to providing auditable information about capital goods and emissions for stakeholders prior to SB 260 making the news.

se gases and carbon emissions, some companies are looking at SDGs, or Sustainability Development Goals. These were set forth by the UN and provide a “shared blueprint for peace and prosperity.” Among the 17 goals is “Climate Action,” which involves taking urgent steps to fight climate change.

One company leaning into SDGs is Norwegian Cruise Lines. They state they have plans to use efficient, clean energy, including the optimization of their HVAC/R equipment. They see tracking and reducing scope emissions as an overall part of their business strategy, since protecting the oceans and the planet are a priority for them.

Another company is JetBlue. They identify the importance of reducing emissions to meet the Climate Action goal that the SDGs outline. As an airline, they work to offset carbon dioxide from jet fuel as much as possible. They see sustainable planning and reporting as key to their company.

SB 260 may put some of the work of SDGs into law, but we were certainly seeing a trend towards reporting emissions and working toward SDGs even beforehand. This is just another step toward codifying what was already in place.

What Investors Want

SB 260 also reflects what investors are now demanding from companies in ESG reporting. ESG reporting and the emissions reporting that comes as a part of them used to be something that only idealistic, future-forward companies would compile. They weren’t considered standard documents.

In recent years, though, indirect and direct emissions reporting have become as important as financial documents. Investment companies are explicitly stating that they consider emissions reporting in investment decisions, and they are just as important as your standard balance sheet.

The SEC’s Rulemaking

SB 260 may not be the only time a governmental body makes Scope 1, 2, and 3 data required.

In fact, before SB 260 even passed the senate, the SEC was already considering rulemaking to make ESG records similar to financial documents. On March 21, The SEC moved forward a proposal to make these documents required at an open meeting. This further legitimize the need for ESG data and reports, and codify what we are already seeing at the state and investor level. If all goes according to plan, ESG records will begin to be required in 2023.

John Coates’ Thinking

A recent statement from John Coates, Acting Director, Division of Corporate Finance at the SEC, points in this direction. In it, he explores where ESG reporting is going in terms of financial disclosures. He compares ESG reporting to asbestos-related disclosures. These disclosures used to be considered non-financial, but over the years, have become financial. He believes this trend is happening with ESG reporting.

Coates believes the ESG reporting needs to be answering questions such as:

• What disclosures are most useful?
• What is the right balance between principles and metrics?
• How much standardization can be achieved across industries?
• How and when should standards evolve?
• What is the best way to verify or provide assurance about disclosures?
• Where and how should disclosures be globally comparable?
• Where and how can disclosures be aligned with information companies already use to make decisions?

With this thinking, it’s not surprising that SEC is moving forward with their rulemaking.

 

What This Means for HVAC/R Pros

So what does SB 260 and similar standards and rulemaking from other entities mean for HVAC/R pros? It means that it’s time to up your refrigerant tracking game.

Business-as-usual approaches relied on paper tracking. Excel spreadsheets or even paper logs were seen as acceptable, as long as people were keeping track of them. This will no longer be the case as ESG reporting becomes not only highly-encouraged, but required by government entities.

The need for more stringent data is here. Digital tracking tools must be used to compile the data you need for the reports you will eventually have to write.

This is where trakref comes in. As a software corporation and environmental software provider, we’ve helped firms complete thousands of successful audits and track hundreds of millions of pounds of gas. It’s time to truly operationalize ESG efforts with regulatory compliance software, environmental compliance calendar software, and an app designed for the front lines.

Break Down Siloes

Another thing that needs to happen is the breaking down of siloes. The business-as-usual approach means that HVAC/R pros and executives writing sustainability reports are not communicating with each other. Now, though, the information that HVAC/R pros from their day-to-day work is needed by C-suite executives signing off on reports that may soon be required by California and the SEC.

Again, trakref is here to help. Technicians can enter information while they are doing their work, whether on an app or through our desktop software. Then, since we allow for unlimited users, this information is available to anyone else in the organization who needs the information to compile a report.

Technology is the way forward to ensure that you have what is needed. We’ll be here for you every step of the way. Get in touch with us today.

Come Talk More About SB 260 and the SEC Rulemaking

We’ll be holding an open mic on Thursday, March 31 at 1:30pm ET to talk more about SEC rulemaking, SB 260, and their impact on reporting and our industry as a whole. Be sure to join us.

You can also download our handout on SB 260 and SEC rulemaking so you can easily share information with colleagues who want to learn more about the potential impacts.