Navigating ESG Reporting Challenges and Maximizing Impact in Vertically Integrated Companies
Thinking about vertically integrating? Power to you.Â
Already vertically integrated? Not only have you expanded your business and minimized risk, but you’ve also likely improved your environmental performance.
Show it off to your investors and customers with an ESG assessment, undergo third party assurance, get an ESG rating, you know, flaunt it.
It makes sense. When you produce your raw materials in house, you have accountability for the materials used and the manufacturing and logistics process. On one hand, you may have increased your corporate scope 1 and 2 emissions, that is, the direct emissions that occur from sources that are controlled by you (scope 1) and the indirect emissions associated with the purchase of electricity, steam, etc. (scope 2). But this increase is a mirage– it’s actually converting your indirect emissions from your suppliers or your product use and end of life (scope 3 emissions). In the carbon footprinting world, this is a very exciting advantage that allows you to stay ahead of the curve in your target market. The more components of the lifecycle are under your operational control, the more control you have in reducing the emissions. It’s much easier to reduce the carbon footprint of your own supplies than it is to demand the same of your suppliers.
When it comes to ESG reporting of companies like yours that are considering vertical integration, there’s great potential to establish yourself as a sustainability leader in your field, opening doors to new investments, lower interest rates (through sustainability finance tools), and ESG stats that will blow your competition out of the water. But to accomplish this, that is, present robust, auditable, and actionable data, you must not fall into the double counting trap.
The carbon footprints of each of your operations can stand on their own, but your corporate carbon footprint will not be their sum. Classic computing tools and spreadsheets won’t be able to understand the intricacies of these processes. Make sure that you’re equipped with an ESG platform that is tailored to complex industries. ECO-OS is one such corporate sustainability solution - the cloud-based software is built to account for complex accounting, and yield actual and actionable intelligence that you can (literally) take to the bank. Getting an ESG assessment is the natural next step if you have a vertically integrated company. You already did the hard work, now you get to reap the rewards.
Glossary
Greenhouse gasses (GHG): Gasses that allow light and heat from the sun to enter the earth's atmosphere, but trap heat on earth, preventing it from being released back into space. These gasses are believed responsible for human-caused (anthropogenic) climate change. The main GHG's that have an effect on climate change include: carbon dioxide (CO2), nitrous oxide (N2O), methane gas (CH4), refrigerant gasses (HFC's).
Carbon Footprint: A measure of the greenhouse gas emissions released into the atmosphere by a person, company, product, or activity. A larger carbon footprint indicates a bigger contribution to climate change. Calculating a carbon footprint involves summing up GHG emissions produced in three main categories: Scope 1, 2, and 3 emissions, and the final sum is typically presented in units of Carbon Dioxide Equivalent (CO2e).
Scope 1 emissions: Greenhouse gasses that are directly emitted from the company's operational facilities and on-site vehicles. This can be the result of fossil fuel combustion (e.g. burning coal for electricity, or gasoline from cars and trucks) or the release of refrigerants from industrial facilities. Data sources used for calculating scope 1 emissions can range from meter readings and invoices (most accurate), to company-wide financial data (least accurate).
Scope 2 emissions: Emissions resulting from energy that was purchased by an organization from external sources (primarily electricity and steam). Like scope 1 emissions, scope 2 emission data sources range from meter readings and invoices (most accurate), to company-wide financial data (least accurate). Scope 2 emission calculations require additional data on the electricity mix of a regional or national power grid in a given year.
Scope 3 emissions: Indirect emissions involved in producing a product, including upstream and downstream emissions. Upstream emissions relate to those activities that support the production of your product before manufacturing (i.e. production and transportation of raw materials, business travel, capital goods, etc.) and Downstream emissions support the distribution and end-of-life of your product (processing of sold products, waste disposal, use of product, etc.) Scope 3 emissions are often the hardest to collect and typically account for the majority of emissions stemming from a product's production (for non-vertically integrated companies.
ESG assessment: A detailed review of the Environmental, Social, and Governmental factors involved in a company that affect its stakeholders: investors, employees, customers, communities, and shareholders. By considering these factors, stakeholders can get a more holistic and comprehensive view of the company's risk, opportunities, and impact. An ESG assessment will examine the company's impact on the local and global environment (pollution, greenhouse gas emissions), local flora and fauna, water resources, and more [Environment], review the impact on local communities and employee welfare [Social], and finally, analyze leadership diversity, corporate conduct, conflicts of interest, and more [Governance].
ESG rating: A score used to compare the ESG activities of different companies, that is commonly used by investors and customers to evaluate a company's risk and impact. Some popular ratings providers include: The Carbon Disclosure Project (CDP), MSCI, and Sustainalytics, among others. To achieve an ESG rating, companies typically have to undergo third party assurance for their ESG data in accordance with the rating agency's criteria.
Sustainability finance tools: A variety of financial instruments that take ESG factors into account when determining more attractive loan conditions or new investments. A Sustainability-Linked Loan (or ESG-linked loan) is one example of this, where the terms of the loan are linked to the borrower's score on ESG indicators. Both the terms and indicators are tailored to the specific industry of the borrower.
Third Party Assurance: The verification and validation of your sustainability report by an independent and qualified external auditor. The review process can be conducted to examine your data, methodologies, and disclosures against established standards, frameworks, or principles (e.g. the Carbon Disclosure Project (CDP), Corporate Sustainability Reporting Directive (CSRD), and many more). There are two different levels of assurance that can be received, limited (lower cost but less rigorous) and reasonable (more thorough and provides a higher level of confidence in the ESG data).