One of the defining characteristics of successful B Corporations is an affirmative commitment to continuous improvement. Obtaining B Corp certification, while impressive, is just the first step. B Corps continuously strive to improve their operations, reduce their impacts, and serve their stakeholders more effectively.

Certified B Corporations are companies that have been certified to have met rigorous standards of social and environmental performance, accountability, and transparency. The B Corp certification process assesses a company and its practices in categories including worker engagement, community involvement, environmental footprint, governance structure, and customer relationships.

Under B Lab’s Theory of Change, B Corps work “toward a world where business is a force for good, and plays a leading role in positively impacting and transforming the global economy into a more inclusive, equitable, and regenerative system.”

The B Corp movement began in 2006 with the idea that businesses could lead the way toward a stakeholder-driven economic model. In the following 18 years, more than 8,000 businesses in 96 countries have become B Corp Certified.

The primary criteria for certification are verified social and environmental performance, legal accountability, and public transparency. As part of the assessment process, companies must undergo an assessment of risk factors based on their industry and other practices. The risk factors are designed to smooth out variations in industries with inherently different environmental impacts and practices.

For instance, large multinational companies are asked to:

Similarly, bottled water companies must meet requirements around sustainable water usage, fair water access, and waste management.

For companies embracing the B Corp concept, completing the assessment and certification process involves a detailed review of the company’s existing processes and practices. The assessment includes answering more than 250-300 questions and providing verification documentation.

This detailed review identifies opportunities for improvement for the company and its operations, and often results in benefits beyond the certification process.

For instance, enhancing employee benefit programs can increase a company’s workforce engagement score but can also improve employee recruiting and retention. Values-driven consumers also appreciate doing business with companies that are focused on doing good. Becoming a B Corp allows companies to join a growing community of purpose-driven business leaders that, in turn, helps to unlock market and collaboration opportunities.

Once companies create a cadence for their internal reviews, the resulting improvement effort becomes self-reinforcing and often continues long after the initial certification.

According to B Lab, nearly two-third of organizations produce higher scores as they undergo the mandatory three-year recertification. For us at Sensiba, the 99.4 score we obtained during our 2022 recertification marked a 23% improvement from our 80.9 score during our initial certification in 2018.

Just as B Corps embrace continual change and improvement, B Labs applies a similar lens to its certification standards. In December 2020, B Labs announced it was reviewing the standards to reflect changing community and stakeholder expectations about companies making positive impacts on society and the environment. They also wanted to consider the evolving global regulatory landscape and have the changing B Corp standards better harmonize with the international regulations.

The new standards will examine applicants’ performance in fair wages, human rights, climate action, environmental stewardship and circularity, and a variety of other topics. Recertifying B Corps must also demonstrate continual improvement over the last three years since their last certification. This marks a change from the current “previous year” standards.

B Labs says the new standards will help clarify and promote effective and meaningful business practices while showcasing the B Corp movement’s role in driving positive change across the globe. The finalized version of the new standards is expected to be released in Q4 2024, with implementation phasing in during 2025.

For more information on what it takes to become B Corp certified and the benefits for your business, reach out to our sustainability and ESG team for an introduction.

Nearly two years after its initial proposal, the U.S. Securities and Exchange Commission (SEC) adopted final climate disclosure rules on March 6, 2024. The new rules require registrants to disclose certain climate-related information in their registration statements and annual reports.

The final rules require a registrant to disclose, among other things:

Large accelerated filers with calendar year-end reporting will begin financial disclosures in annual reports for the year ending December 31, 2025, with the start of GHG emissions and related assurance ranging from 2026 to 2033.

Accelerated filers will begin financial disclosures after December 31, 2026, with limited GHG emissions starting in 2028.

Non-accelerated filers, smaller reporting companies, and emerging growth companies will begin financial disclosures after December 31, 2027. They will not be required to make GHG-related disclosures.

Scope 1 and 2 emissions, if deemed material by a registrant, will need to be disclosed on Form 10-Q for the second fiscal quarter following the year to which the GHG emission disclosure relates.

The rules also face legal challenges that could affect their ultimate implementation date.

The SEC adopted the new rules in response to growing investor interest in climate-related risk and the financial implications for public companies. SEC Chair Gary Gensler said 90% of the companies in the Russell 1000 stock market index currently provide climate-related disclosures, predominately in annual sustainability reports. Climate-related disclosures may also appear in quarterly and annual SEC filings and registration statements.

Erik Gerding, director of the SEC’s Division of Corporation Finance, said because climate-related risks can affect a company’s performance and share price, investors are interested in the potential effects on the registrant’s strategy, results, and financial condition. Despite this interest, climate disclosures are often inconsistent, and can be difficult to find and compare across entities.

Elliot Staffin, special counsel in the SEC’s Office of Rulemaking, said registrants will be required to disclose any climate-related risks that have had, or reasonably will have, a material impact on registrants, as well as the mitigation processes companies have integrated into their risk management systems.

In its final rules, the SEC omitted the required disclosure of Scope 3 GHG emissions from registrants’ value chains (aka indirect emissions). The omission came in response to registrants’ comments to the initial proposal that collecting the required data would be challenging and cumbersome.

Even without an SEC mandate, private companies will surely face increasing requests from their public-company business partners to provide their sustainability- and climate-related risks and opportunities.

The regulatory landscape, however, goes beyond the federal level. In June 2023, the International Sustainability Standards Board (ISSB) issued requirements for companies reporting under IFRS to disclose the impacts of industry-specific sustainability issues and climate-related risks. Further, In October 2023, California enacted two laws mandating Scope 1, 2, and 3 reporting by companies operating in the state that report more than $1 billion in revenue. As a result, certain retailers and distributors have now made it “table stakes” to report greenhouse gas emissions and other ESG-related information to do business with them.

Beyond regulatory considerations, more companies are examining Scope 3 emissions as part of comprehensive reviews of their supply chains and the associated risks. Small and medium-sized businesses can expect additional questions about topics such as their manufacturing practices, including chemicals and byproducts, and their labor sources.

As large companies compare and select suppliers, they understand that choosing a partner with more sustainable manufacturing practices often leads to lower costs and reduces the reputational risk of being associated with suppliers with undesirable behaviors.

To learn more about the new SEC requirements or effective sustainability- and climate-related disclosures and reporting, contact us.

Biodiversity, a measure of the variety of life on Earth, encompasses the diversity of plants, animals, and microorganisms, as well as the ecosystems they form and the variety of interactions between species. Biodiversity is essential to the health of our planet and all functions on earth, but its significance extends beyond environmental benefits and has profound implications for business.

In fact, new research from S&P Global Sustainable finds that 85% of the world’s largest companies in the S&P Global 1200 have a significant dependency on nature across their direct operations.

Economic endeavors rely heavily on biodiversity and natural capital, highlighting its importance as a driver of sustainable growth and innovation. Biodiversity underpins essential ecosystem services businesses rely on, including water purification, crop pollination, climate regulation, and nutrient cycling. Preserving biodiversity can ensure the continued availability of these critical services, directly benefiting businesses that rely on natural resources.

Changes to, or the loss of, natural ecosystems and the biodiversity within those ecosystems can have profound implications on companies in a variety of industries.

Agribusinesses, for instance, depend heavily on pollinators like bees for crop production. The loss of biodiversity, often caused by pollution, deforestation, and unsustainable land use, can disrupt these services, leading to increased costs and reduced productivity.

Consider the tourism and hospitality sector, which often depends on natural features, such as coral reefs, to attract tourists interested in snorkeling and diving. Coral reefs support diverse marine life, and their decline due to climate change and pollution can reduce tourism revenue.

The automotive sector depends directly and indirectly on biological diversity and ecosystems for renewable resources such as natural rubber for tires, leather for seats, and ready access to water supplies for production processes.

In the financial sector, biodiversity can be a consideration for investment decisions. Accounting firms are increasingly being asked to evaluate ESG disclosures as well as financial reporting.

The diversity of species offers a variety of materials, chemicals, and organisms essential to new products and services. Pharmaceutical companies, for instance, derive numerous drugs from compounds found in plants and animals. Similarly, the fashion industry relies on the variety of plant and animal fibers for fabrics and clothing production. Biodiversity is vital for research and development, driving innovation in various industries.

Preserving biodiversity can also open new markets and create economic opportunities. Consumer demand for eco-friendly and sustainable products is rising, and companies that integrate biodiversity considerations into their operations can gain market share. This shift can lead to the development of new business models, such as eco-tourism or sustainable agriculture, that can be profitable and environmentally sustainable.

For businesses, investing in biodiversity can act as a risk mitigation strategy because biodiverse ecosystems are typically more resilient to market volatility. For example, a diverse forest can be more resistant to pests, benefiting the timber industry. Biodiversity also plays a role in climate change mitigation, which is increasingly becoming a concern for businesses worldwide due to regulatory and reputational risks.

Recognizing the interdependencies within an ecosystem—specifically, the extent to which an organization depends on ecosystem services—can provide valuable insights into the potential risks the organization might encounter if an ecosystem service is disrupted.

From another perspective, engaging in biodiversity conservation can enhance a company’s reputation and brand value. Consumers have become more acutely aware of environmental issues and favor businesses that are committed to sustainability.

When a company openly communicates its dedication to eco-friendly practices, it showcases transparency and accountability and can build trust over time. This trust becomes a valuable asset, particularly during times of crisis or when introducing new products or services.

With the growing emphasis on sustainability, governments worldwide are implementing regulations to further protect biodiversity. Businesses will benefit from being proactive in understanding these regulations to be better protected from the financial risks of noncompliance. Additionally, tax or other financial incentives will likely continue to be available for businesses that successfully and consistently demonstrate a commitment to sustainable practices.

The economic benefits of biodiversity are abundant. Biodiversity ensures the longevity of natural resources that are essential for business operations and opens avenues for innovation, risk mitigation, and market growth. While the global economy benefits from nature, it is also driving nature loss and simultaneously prohibiting ecosystems’ ability to sustain their intrinsic services.

As the world more fully recognizes the importance of sustainability, biodiversity will become a crucial factor in strategic business planning, offering challenges and opportunities. Companies that understand and integrate the value of biodiversity into their business models will likely thrive in the emerging green economy and find value in staying aware of current conservation efforts.

If you’re curious about the benefits of biodiversity and risks associated with your industry, reach out to the Sensiba sustainability team for more information.

Does focusing on environmental, social, and governance (ESG) mean you have to sacrifice financial performance or shareholder returns? Recent studies suggest the opposite – that ESG and sustainability priorities benefit valuations over the long-term, particularly when integrated into the company’s core strategy.

ESG falls under the broader triple-bottom line sustainability umbrella wherein investors, analysts, and business leaders evaluate the impact of the industry- and sector-specific sustainability issues on a company’s risk profile and performance. For decades, leading investment funds like TPG, KKR, and BlackRock have incorporated ESG considerations into their evaluation process, with positive results that point to long-term value creation as a result of measuring and monitoring their sustainability-related risks and opportunities.

In years past, sustainability reporting frameworks were scattered, divergent, and confusing, making consistent and efficient measurement and reporting challenging for most companies because they weren’t sure where to start their baselining and benchmarking efforts.

This has changed in recent years as a few key guiding frameworks have begun to develop harmonized standards for how companies are evaluated on key ESG issues such as climate, diversity, equity, and inclusion (DEI), data security, and corporate governance. Among the most commonly referenced frameworks include the Principles of Responsible Investment (PRI), the ESG Data Convergence Initiative (EDCI), and the International Sustainability Standards Board (ISSB).

ESG has also sparked controversy, with detractors complaining that it is redundant, measurement is subjective and difficult to benchmark, it requires sacrificing returns, and it creates an overall distraction from a company’s most important issues. Despite this pushback, ESG and sustainability considerations are trickling down to the middle market. General partners who don’t pay attention to this megatrend are at risk on multiple levels, especially as it relates to accessing limited partner capital and the risk of reduced terminal values.

According to Ryan Williams, PhD, former Chief Sustainability Officer at Coatue Management and Sustainability Operating Partner at NextWorld Evergreen, and current strategist with VITAL, “Anti-ESG backlash is simply the politicization of ESG that was initiated in several state legislatures as a response to what they perceive as ‘woke capitalism,’” he says. “Effective ESG integration, on the other hand, is a value creation strategy that creates outcomes for key stakeholders—customers, employees, and investors, that drive financial performance.”

Michael Whelchel, Co-Founder and Managing Partner at Big Path Capital, an investment banking advisory firm working with leading mission-driven companies and private equity funds agrees about the value creation impacts inherent in integrating sustainability principles.

“Companies that integrate sustainability principles into how they develop and deliver their product or service activate value creation on two different levels,” he says. “First, they reduce business risk and cost, thereby creating a more resilient business model. Second, they increase upside for their business by being in step with customer interest and better identifying areas of innovation.”

Several recent studies reaffirm the assertion that good ESG practices support long-term value creation and can help lead to optimal results for GPs.

A 2023 Pitchbook Sustainable Investment Survey interviewed hundreds of private market GPs and LPs about their opinions on impact investing and ESG frameworks, and determined that “investing for profit and investing for purpose…need not be mutually exclusive.” Proponents for ESG integration cited the following considerations:

A 2023 analysis by McKinsey & Company of over 2,200 public companies came to a similar conclusion that “financially successful companies that integrate environmental, social, and corporate governance (ESG) priorities into their growth strategies outperform their peers—provided they also outperform on the fundamentals.”

Their research highlighted companies they dub “triple outperformers,” which evaluate total shareholder returns (TSR), financial performance, and ESG ratings. The analysis shows how growth and profitability are positively impacted when a company also demonstrates leadership on ESG issues, by up to 7 percentage points above the study’s baseline.

A 2022 KPMG study on Managing ESG Due Diligence in EMA Deals surveyed 150-plus dealmakers across Europe, the Middle East, and Asia about the importance of conducting ESG due diligence.

While the study clearly acknowledges that ESG enhances value (80% of dealmakers said they consider ESG in M&A and that material concerns could be a dealbreaker), it also highlights some common difficulties related to performing ESG due diligence accurately and consistently. These include undefined scope, poor data availability, lack of written policies, and difficulty quantifying metrics and targets.

This data illuminates the growing recognition of ESG considerations among dealmakers and underscores the opportunity to approach ESG as a platform for venture capital and private equity. The platform approach is a compelling opportunity for portfolio engagement to leverage shared learnings, create tools, and identify best practices to maximize value creation potential. Furthermore, because most small and medium sized funds focus on a subset of business models within an industry, there are inherent synergies across most portfolios such that GPs can build out a small but effective suite of material metrics to monitor across the portfolio. 

“ESG considerations have increasingly become a strategic negotiation tactic for private equity firms where the absence of an ESG program can be identified as unknown risk that may influence the valuation,” says VITAL’s Williams. “Companies that disclose ESG topics in due diligence often have a stronger negotiating position and may attract a broader range of buyers when they are able to provide ESG metrics.”

There is also growing recognition that the fiduciary responsibilities for board members are expanding to include ESG issues. If your board is not currently conducting comprehensive sustainability or ESG due diligence assessments, you may be lagging in effectively managing risks, meeting stakeholder expectations, and capitalizing on long-term opportunities. Momentum is continuing to shift toward more urgency, transparency, and disclosure on sustainability issues. Terminal values are being affected, regulations are on the horizon, and access to LP capital is increasingly at stake.

ESG risks do influence valuation and mitigation is frequently critical to a company’s exit strategy and investor returns. And while a lot of work remains in terms of data standardization and consistent comparison, progress is being made by groups like the ESG Data Convergence Project to support the investor due diligence process.

It is critical for GPs to engage in due diligence and performance monitoring now, and not as a pre-exit exercise, because doing so will position them for success, help mitigate risk, enhance the value of their investments, address stakeholder expectations, and create sustainable value for the long-term.

GPs looking for a place to start should perform an ESG Due Diligence assessment to help them better understand company- and industry-specific sustainability risks and opportunities for their portfolio companies, and begin to understand how to integrate these considerations into their core strategies. Contact us to learn more.

As sustainability and environmental, social, and governance (ESG) considerations gain momentum in the marketplace and the media, implementing sustainability in manufacturing is becoming increasingly crucial for businesses. The manufacturing industry is multifaceted and can be complex, but the many benefits of ESG work apply throughout sub-segments in the manufacturing world.

Below, we outline nine of the best business case reasons for your company to start or continue your ESG and sustainability journey.  

Governments worldwide are increasingly imposing stricter environmental regulations. Europe has its Corporate Sustainability Reporting Directive (CSRD) and the U.S. Securities and Exchange Commission (SEC) has proposed climate-related disclosure rules. Additionally, California has enacted two bills, SB 253 and 261, to mandate climate-related disclosures. Adopting sustainable practices helps manufacturers stay compliant, avoiding fines and legal issues.

Sustainable manufacturing often reduces resource consumption and waste production, while generating energy savings that can lower operational costs over time. Typical steps include adding solar, upgrading to Energy Star appliances, installing low-flow faucets and toilets, and using grey water in eco-friendly landscapes. You can add batteries to your solar arrays to control production during rolling power outages or switch your power during periods of peak rates.  

Assessing and reducing your carbon footprint is also key. This involves measuring greenhouse gas emissions from your operations and setting science-based targets to progressively reduce those emissions. Quantifying and decreasing your carbon footprint, such as reducing energy use and business travel, saves money while ensuring compliance and improving climate resilience.

Sustainability initiatives often drive process improvements and innovation, increasing operational efficiency. Investing in sustainable R&D can lead to breakthroughs in cleaner production methods and technologies. Optimizing production processes can enhance productivity and reduce waste.

Demonstrating a commitment to sustainability and ESG can improve a company’s reputation and brand image that, in turn, can attract environmentally conscious customers and investors. Sustainable manufacturing practices can build customer loyalty as consumers prefer to support environmentally responsible manufacturers and companies that align with their values. Patagonia’s customers, for instance, are highly vocal about supporting the brand. Their loyalty and brand advocacy help market the company in the most authentic way, lowering its marketing costs.

We recently had our marketing team investigate what new marketing swag we wanted to have this year. They made a list and then overlaid which companies were sustainable, B Corp, or minority owned. The companies that weren’t didn’t receive further consideration.

Sustainability efforts can help leaders identify and mitigate potential supply chain disruptions, climate change, and resource scarcity risks. This can ensure a more reliable flow of materials and reduce the impact of disruptions. For example, the companies that localized their supply chain before COVID had a much better survival and easier bounce back.

Resilience in the face of these challenges can protect the long-term viability of the business while increasing organizational agility.

ESG performance is increasingly considered by investors, banks, and insurance firms when making investment, lending, and coverage decisions. Companies with strong ESG practices may have easier access to capital, and lower borrowing and premium costs.

Sustainable practices can drive innovation in product design and manufacturing processes. Companies that innovate in sustainability often gain a competitive edge in the market. Reducing your packaging or changing to recycled materials can lower costs directly and indirectly. Eco-friendly packaging materials are usually lighter, so you spend less to ship heavier materials.

As employees seek purpose-driven organizations, demonstrating a commitment to sustainability can attract and retain top talent. When we added our B Corp logo to our recruiting booth, students flocked to us, and other firms started to notice and ask what a B Corp was. We also have many hires that say, when weighing offers, they reviewed our Sustainability Impact Report and were sold on our company. Sustainability matters to your employees.

Sustainability practices are critical for the long-term viability of the manufacturing sector. As resources become scarcer and environmental pressures mount, companies that embrace sustainability are more likely to thrive.

You have been making business decisions based on financial metrics for years. Adding  non-financial ESG metrics gives you a bigger picture of the health of your organization so you can make better business decisions for a longer-term view.

Starting to work through sustainability and ESG initiatives for your business is a financial imperative due to many business risks. It’s essential to analyze your specific situation, identify potential benefits and risks, set clear goals and targets, and develop a comprehensive strategy for integration. Contact us today to undergo a High-Level ESG Assessment to better understand which ESG metrics and sustainability risks are material to your manufacturing business.

Contributions By: Julien Gervreau and Karen J. Burns

During Climate Week NYC, several key areas were top of mind for attendees, such as aligning strategic priorities between investors and leadership, fostering incentives among suppliers, and the need to unite efforts across various industries and sectors. The proposed solutions and recurring themes included strategies for climate initiatives within organizations, the technical aspects of Scope 3 decarbonization, the importance of prioritizing indigenous communities on the front line of equitable climate action, and more.

For those of us working in sustainability, we are accustomed to experiencing periods of high engagement in collective action and a sense of momentum, as well as moments of searching for the collective will to expedite significant progress in addressing the impending climate crisis.

Members of Sensiba’s ESG and Sustainability practice participated in Climate Week NYC and have outlined some of the key takeaways below.

There is growing recognition that sustainability goals need to be integrated into corporate strategy. This necessitates a process for incorporating sustainability objectives into the annual planning and budgeting process.

Also, it establishes a formal mechanism for holding employees accountable for driving tangible progress against sustainability goals. Regardless of the position’s title, every organization benefits from having a sustainability lead with a direct line of communication not only to the CEO, but preferably to the board.

Tia Counts, Chief Sustainability Officer at MSCI, presented a useful primer framed as the ABCs of interacting with the CEO/board from the perspective of the sustainability lead:

By integrating corporate sustainability into the existing governance committee, ownership is expanded and embedded throughout the organization. This provides your sustainability lead with the requisite architecture to build a successful roadmap, preventing this position from becoming siloed and over-burdened.

Further steps to shape and implement strategy include establishing a formal governance and disclosure process for your sustainability efforts, as well as transitioning from storytelling to sharing investor-related data. ESG metrics should be embedded throughout the organization, reviewed by the sustainability lead, and reported to the board.

The topic of climate change has always been susceptible to politicization. Entrenched concepts of individualism in the U.S. have led many to discount the negative effects of fossil-fuel-dependent systems and deny that change is needed.

Mindy Lubber, CEO and President of Ceres, underscored the urgency of tangible actions to address climate change in her keynote session entitled “Driving Change: How Do We Restart Stalled Corporate Climate Action?”

Some key thoughts and quotes:

So, how do we make changes in an environment where climate and ESG are politicized? The increasing frequency and intensity of global climate-related disasters is becoming harder to ignore. In harnessing the power of storytelling and communication about the impacts on nature and the environment, there’s potential to reach a broader audience instead of focusing the discourse on carbon or technical terminology.

Getting entities involved across sectors and industries, regardless of political affiliations or leanings, may require mandates. Large companies have an opportunity, and perhaps an obligation, to support supply chain transformation, as SMEs frequently lack access to resources on the same scale. Companies that prioritize setting quantifiable commitments and transparently reporting progress and pitfalls stand to benefit from enhanced transparency, trust, and collaboration. 

At a panel entitled, “Brands Scaling Scope 3 GHG Solutions,” hosted by Pure Strategies, a focus was placed on addressing issues of alignment, data collection, and management. The panel discussed barriers to overcoming key challenges most companies face when looking to make progress on climate goals.

Key ideas included:

Once an entity’s data collection practices are established for climate-related baselines and metrics, significant emissions contributors can be identified for targeted decarbonization initiatives. The top recurring themes for emissions “hotspots” discussed included transportation, production activities, and packaging.

Insightful tactics detailed by panelists from Ben & Jerry’s, Stonyfield, and LUSH Cosmetics included:

Nature, biodiversity, and climate justice continue to rise in importance and prominence. These impact areas are likely to be formalized in disclosure guidance this year, or early next year, through the adoption of the Taskforce on Nature-related Financial Disclosures (TNFD) framework into IFRS/ISSB standards.

Powerful calls to center diverse voices arose from the session, “How Youth Are Setting the Pace for Climate Equity.”  Panelists included Isaias Hernandez (Founder, Queer Brown Vegan) and Ziad Ahmed (CEO, JUV Consulting), who embodied the intersectional lens through which solutions to the climate crisis should be regarded.

Gen Z is a growing presence in the workforce and marketplace. They are seeking to invest their time and money in entities demonstrating transparent, credible action against social and environmental impact goals.

What is an accounting firm’s role in climate action? ESG and sustainability-related regulations are emerging and evolving. They’re providing growing opportunities for the profession to provide holistic risk assessments that incorporate financial and climate-related risks and identify related value-creation opportunities.

The methodological discipline and rigor of financial accounting lends itself readily to a need for more refined GHG accounting practices, as well as assurance for GHG inventories.

Emissions footprints, sustainability metrics, and ESG disclosures will soon be mandated and therefore integrated into financial reporting for public companies. This means private companies will also be expected to report on their performance upstream. We all need to be taking strides toward a just transition – not just because it makes good business sense, but because there is no time to lose. To learn more about aligning climate, compliance, and financial risk, contact our sustainability team.

The enactment of two significant climate-related bills in California will increase environmental disclosure requirements for public and private companies of all sizes.

On October 7, Gov. Gavin Newsom signed into law two bills that collectively represent the first regulatory action in the United States requiring companies to measure and report out on their climate-related risks and impacts:

Under the new law, California’s Air Resources Board (CARB) will need to approve implementation rules by 2025. By 2026, companies will be required to report direct GHG emissions, as well as those used to power, heat, and cool their facilities. By 2027, companies will need to disclose indirect emissions as well.

In signing a statement associated with SB 261, Newsom said he believes the implementation deadlines do not provide CARB with “sufficient time to adequately carry out the requirements in this bill,”.

He also expressed concern about the bill’s financial impact on businesses. Newsom shared similar concerns about SB 253, and asked the legislature and CARB to examine the implementation schedule and potential implementation costs.

Sensiba will continue to monitor and engage in this process through our association with CalCPA and AICPA as these regulations are finalized and adopted.

On the surface, these bills may seem like they only impact large companies, but their requirements will likely affect small-to-medium-sized enterprises as well—particularly companies involved in the supply chain of larger businesses.

For example, a small business that sells to a large publicly traded retailer operating in California should expect questions from its larger partners about its carbon footprint and any associated emissions reduction plans.

This legislation creates an opportunity right now for companies to measure their carbon footprint as they prepare to comply with these new regulations. Companies can also use this opportunity to begin to identify the climate impact associated with their business.

Examining and reducing a company’s carbon footprint can also produce unexpected cost savings that emerge after adopting more sustainable business practices. To learn more about these California climate disclosure bills and carbon accounting, contact our sustainability team.

To develop solutions for a brighter future, sustainability must be intertwined with innovation and development. Using sustainability as a guiding principle is vital in research and development (R&D). Sustainability, as defined by the United Nations, involves meeting the needs of the present without compromising the ability of future generations to meet their own needs. This approach is important for addressing the biggest challenges humanity faces.

R&D activities often have direct or indirect impacts on the environment and society. By integrating sustainability into R&D practices, we can protect essential resources for current and future generations, advance social and economic equity, and contribute to global efforts to combat climate change and protect biodiversity.

Through responsible R&D, environmental and social responsibility can be achieved harmoniously alongside economic viability. This is because sustainability drives long-term vitality for companies while inspiring innovation and competition throughout the industry.

By leveraging science and technology, companies can develop products that have a positive effect on the world and reduce negative impacts. Furthermore, the integration of sustainability into product development (rather than as an afterthought), can ultimately reduce costs and time investment by fostering the efficient use of resources.

Technological advancements and innovation will be pivotal in rapidly implementing sustainable practices and policies to meet the 17 Sustainable Development Goals (SDGs) set by the United Nations. As mankind progresses, there will be a shift toward a circular economy where waste is minimized and resources are repurposed efficiently and recycled whenever possible.

Adding sustainability as a key objective brings significant challenges. While sustainable practices are often cheaper in the long run, there are higher upfront costs and limited funding often constrains sustainable product development. Additionally, focusing on short-term financial gains in some industries may lead to reluctance to adopt sustainable practices as organizations prioritize immediate profits over long-term sustainability investments.

Overcoming these financial hurdles requires a mindset shift to recognize sustainability as an essential and value-enhancing aspect of R&D rather than an additional cost burden.

There’s rarely an easy solution when it comes to sustainability. Every decision involves a trade-off where harm is mitigated in one alternative but may cause an unintended harmful effect elsewhere. For example, electric vehicles can help reduce greenhouse gases over their lifetime but can cause environmental and social harm in certain communities as precious metals are mined for use in batteries.

Finally, data availability and the complexity of global supply chains present obstacles that require careful consideration and strategic collaboration. As the world becomes more interconnected, supply chains often span multiple countries and involve diverse stakeholders. Achieving sustainability in this context requires strategic collaboration among all parties involved, including suppliers, manufacturers, distributors, and consumers.

Despite these challenges, the benefits can be substantial. By prioritizing sustainability, we can help ensure cleaner air and water, optimize resource allocation and provide better living conditions and social equity—all with long-term economic growth in mind.

Moreover, organizations that interweave sustainability into R&D gain a competitive edge. It helps differentiate them in an increasingly environmentally conscious and aware market.

To practice sustainable R&D, companies can incorporate the following strategies:

The Research and Development Tax Credit can be a valuable benefit for any company engaging in product development. Incorporating sustainable practices into the R&D process will likely pay off in various ways during the product lifecycle and result in a larger R&D credit now. While the R&D credit doesn’t provide a direct incentive to incorporate sustainable design, the additional effort required to incorporate these practices can indirectly result in a larger credit due to the additional upfront cost of prioritizing sustainability and lifecycle thinking.

Integrating sustainability into R&D is essential to meet sustainable development goals and provide for the well-being of current and future generations. Through technology, we can create innovative solutions that benefit the environment and society, drive growth, and support economic vitality.

To learn more about sustainable R&D, contact our sustainability team.

Edited by: Julien Gervreau

To manage your company’s emissions and plan reductions, you must first be able to quantify those emissions and identify their sources. The best tool for accomplishing these goals is a Greenhouse Gas (GHG) accounting inventory, which helps organizations identify opportunities for waste or cost reductions, respond to stakeholder inquiries, and prepare for changes in evolving regulatory requirements.

To the last point, the EU’s Corporate Sustainability Reporting Directive (CSRD) will require approximately 50,000 companies, including small and medium enterprises (SMEs), to start issuing sustainability reports in 2024. Additionally, the recent harmonization of ISSB standards has seen the publishing of IFRS S1 and IFRS S2, providing climate-related reporting and disclosure guidance.

Demonstrating credible contributions to climate action can also provide an advantage when seeking access to capital or differentiating your brand in a crowded marketplace.

GHG accounting is the process of measuring the emissions resulting from your company’s operations. Standardized methodologies for GHG accounting, developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), are delineated in the GHG Protocol: A Corporate Accounting and Reporting Standard. The first edition of the standard was published in 2001, with the Scope 3 Corporate Value Chain released in 2011.

The Greenhouse Gas Protocol is currently undergoing a governance restructuring to update their standards, with a goal of finalization in 2025. The intent is to ensure standards and guidance can offer a rigorous and credible accounting foundation. The International Organization for Standardization (ISO)’s 14064-1 is another framework that provides technical guidance at the organizational level for quantifying and reporting GHG emissions and removals.

The GHG Protocol Accounting Standard covers six greenhouse gases from the Kyoto Protocol. These gases are:

Boundaries are beneficial for pursuing the elusive work/life balance, and crucial to the GHG accounting process. The process begins by determining organizational boundaries – the businesses and operations owned or controlled by the company. This is particularly salient for companies that have jointly owned or controlled entities. Deciding on an approach to boundary-setting will delineate which operations, and what percentage of those operations, should be included.

Companies must choose an equity share approach or a control approach. If an organization proceeds with the equity approach, they apply the percentage of equity share to calculate the company’s share of operations. For the control approach, there are two pathways: financial or operational control.

The financial control approach is predicated on the concept that directing financial and operating policies enables an entity to gain economic benefits, regardless of legal ownership status. Does your company hold the ability to set and implement operating policies? If so, it can likely influence and reduce GHG emissions directly. Following this approach, your company will account for 100% of emissions from operations determined to be under its operational control.

Once organizational boundaries have been set, those boundaries are used to determine the operations and sources generating emissions. Emissions sources are designated as either direct or indirect. Direct emissions sources are owned or controlled by the company. In contrast, indirect sources are considered a consequence of the activities of the company.

In alignment with the GHG Protocol, emissions are grouped together under three scopes and 15 categories. Direct emissions, also known as Scope 1 emissions, originate from things like fuel combustion in company-controlled vehicles and facilities, as well as fugitive emissions. Scope 2, or indirect emissions, are those that usually occur at a power plant not owned or controlled by your company. This includes purchased electricity, heat, or steam.

Scope 3 emissions, arising from the value chain, tend to house most emissions that comprise an organization’s GHG inventory. The Carbon Disclosure Project’s Global Supply Chain Report 2022 highlighted that Scope 3 category emissions accounted for a magnitude of 11.4 times greater than direct emissions. Scope 3 emissions are divided into 15 distinct categories incorporating value chain activities that are characterized as being either upstream or downstream.

Upstream emissions categories correlate with activities related to suppliers and internal operations. Downstream emissions categories include activities tied to customers and the full lifecycle of products, such as the product-use phase and the end-of-life treatment phase, in addition to leased assets, franchises, and investments.

Depending on whether your company manufactures a physical product or provides professional services, certain categories will likely have greater relevance than others. For a consumer-packaged goods (CPG) company, for example, purchased goods and services will entail looking at purchase orders or bills of materials to determine the emissions resulting from the inputs used to make the final product.

On the other hand, this category for a professional services firm would encompass office supplies, including paper products, as well as consulting or marketing services. For a CPG company, transportation and distribution may constitute a significant proportion of emissions, while for a service provider, their major contributors would be employee commuting and business travel.

Figure 1 – Overview of GHG Protocol scopes and emissions across the value chain

Regarding data collection practices, organizations should prioritize collecting actual physical or activity data over monetary spend, as it allows for heightened granularity and accuracy in calculating emissions. “De minimis” levels are used to determine whether an error or omission is a material discrepancy or not. Once data is collected from your organization, as well as important suppliers and partners, calculations can begin.

The foundational equation for Greenhouse Gas accounting is: Activity data x emission factor = emissions. Emission factors then convert activity data to emission values.

According to the GHG Protocol Corporate Standard, organizations should choose a base year for which verifiable emissions data is available. There is a wide range of voluntary disclosure frameworks, depending on your report’s target audience. Some CPG brands might receive supply chain survey requests from their distributors through CDP, while others might benefit from the direct consumer-facing Climate Neutral Certified label and publish findings in their annual impact report.

In some instances, a third-party verifier may be required to validate the GHG inventory report. To prepare for success, best practices for GHG accounting align with the following principles: relevance, completeness, consistency, transparency, and accuracy.

After conducting a GHG accounting inventory, it’s time to set GHG emissions reduction targets and develop a climate action plan. Target-setting through such organizations as the SBTi (for larger businesses) or SME Climate Hub (for small-to-medium sized businesses) can ensure a level of rigor and alignment with science-based approaches deemed necessary to decarbonize the global economy by 2050 at the absolute latest.

An essential follow-up to target setting is the creation of actionable plans to reduce emissions. This provides the opportunity to engage with your employees, suppliers, consumers, and the broader community. Through in-house expertise, and relationships with expert partners such as Climate Neutral, we are well positioned to support your organization on its climate action journey. Contact our sustainability team for more information.