Conventional approaches for measuring a company’s progress toward combating climate change focus on reductions of greenhouse gas emissions.
What’s missing in those assessments of outcomes for the planet and people: a broader “sphere of influence” lens that measures a company’s “societal-level climate solutions,” according to an article this month in Harvard Business Review.
In their joint article, “To incentivize companies to address climate change, measure their broader impact,” Solitaire Townsend, the CEO and co-founder of Futerra, a London-based marketing agency focused on sustainability strategies, and Kaya Axelsson, the head of policy and partnerships at the University of Oxford’s Oxford Net Zero research program, argue for an additional approach that teases out the broader impact of green efforts.
Their solution: A way “to separately recognize, incentivize and measure the impact and influence of entrepreneurial corporations trying to drive down emissions beyond their own doors,” the authors write. Such a “sphere of influence” method extends beyond an examination of a company’s soup-to-nuts operations, and focuses on a business’s work in three “spheres” impacting society: climate-friendly products, investment practices and policy stances. The approach, they argue in their Sept. 6 article, would help “mobilize companies as system-level actors” in the climate crisis.
Scoping out emissions
Most carbon accounting frameworks rank companies on their emissions inventories according to the now-familiar “scopes” outlined in the Greenhouse Gas Protocol, the global standard for measuring and managing emissions. So-called Scope 1 emissions include direct emissions from an organization’s operations; Scope 2 includes indirect emissions, for example, from electricity and gas used to produce goods and services.
In March, the US Securities and Exchange Commission moved to require large publicly traded companies to disclose their climate risk and emissions from their operations and energy usage. That month, a federal appeals court imposed a temporary stay on the regulator’s new rules.
Scope 3 – a mostly voluntary measure that can be difficult to track – covers the indirect emissions from a company’s full value chain, such as those generated by supply chain activities or by end use of a product.
Some people are pushing for Scope 4 emissions, a fuzzier category that refers to greenhouse gasses that were never emitted in the first place, thanks to the use of a green product or service. Scope 4 “avoided emissions” might include the emissions averted when solar panels replace fossil fuel energy sources or software programs help to optimize operations and save energy.
‘Tinkering’
The trouble starts when carbon accounting is integrated with broader measures of a company’s impact, as is often done in environmental, social and governance, or ESG, assessments.
For example, the broader positive climate impact of Tesla’s core business of making electric vehicles may be undercounted due to the company’s troubles with an ongoing federal investigation into fatal crashes and racial and labor complaints about its Fremont, Calif., EV factory (both of those are social and governance factors). The authors write that while Elon Musk’s company needs to do more to reduce the energy it uses in manufacturing (not to mention its supply chain), it does put green cars on the road — a societal-level impact.
Meanwhile, fossil fuel companies like ExxonMobil can get credit for launching carbon capture operations while still drilling for oil and gas.
The current system also incentives companies and organizations to “tinker around the edges.” For example, the authors write, airports can get credit for sustainable waste management strategies and plant-based food sales to travelers while remaining silent about the fossil fuel emissions of the flights they enable.
“Achieving net zero carbon emissions globally is more complex than just summing the emissions reductions achieved by individual actors, and the current system of greenhouse gas accounting doesn’t take a systemic perspective,” Claire Wigg, the head of the climate performance practice at Exponential Roadmap Initiative, tells ImpactAlpha.
(See, “Are fund managers ready to set targets to hold themselves accountable for impact? (Q&A))”.
Scopes vs. spheres
Today, “companies that have low emissions footprints but high potential wider impact can look like they are making year-on-year progress by making small efforts to reduce their [emissions] inventories while failing to tackle the most difficult, high impact work they could be doing for the world,” Axelsson tells ImpactAlpha.
A spheres of influence approach can avert that disconnect by filling what the authors call “the solutions gap” in carbon management.
What the authors call Sphere A centers on “product influence,” meaning the development of products or services that replace carbon-intensive activities and/or help customers/consumers avoid or reduce emissions.
Sphere B, or “portfolio influence,” revolves around a business’s investments and purchases, including credits, philanthropy and catalytic finance.
Sphere C, or “policy influence,” refers to a company’s advocacy for policies, and removal of barriers, to enable climate transition.
By addressing “product influence,” the paper would appear to be calling for a Scope 4 lens in carbon accounting. But it doesn’t use that term.
Calling the sphere a scope, Axelsson told ImpactAlpha, “could make people want to net the total figure with value chain inventory emissions” — an accounting move that could lead to greenwashing.
For example, who can claim credit for the emissions avoided by wind turbines? The manufacturer? Installer? Local government agency that provided tax incentives? Private or philanthropic capital that helped fund them?
Splitting the question
Reducing “emissions inventory,” meaning a company’s carbon footprint, and generating a positive impact are typically seen as flip sides of the same coin. But they “are fundamentally different questions, both equally important for companies to consider and report on,” Townsend and Axelsson write.
“By proposing two separate and distinct tracks, inventory and impact, we avoid organizations trying to conflate” societal-level impact with operational reductions, Townsend tells ImpactAlpha.
Townsend and Axelsson don’t detail what sphere of influence reporting would actually look like. And they acknowledge it could open a new frontier of greenwashing. Companies might shift to highlighting their “wider contributions” and downplaying their missed climate targets. But greenwashing already exists. And current methods understate some companies’ progress while overcounting others’.
With the current state of play not working, the authors argue, businesses with low marks may think ‘why bother?’ and be less incentivized to pursue climate-friendly initiatives, while others get a greenwashed pass.
Spheres of influencers
Other groups are also beginning to look at climate action beyond the value chain.
The Exponential Roadmap Initiative, a sustainability coalition of large companies, has a 4-pillar framework called the 1.5C Business Playbook centered on reducing your own emissions, lowering value-chain emissions, creating and scaling solutions, and “accelerating climate action in society.”
Last year, the World Business Council for Sustainable Development, a CEO-led organization of more than 200 businesses that is behind the Greenhouse Gas Protocol, issued guidance on assessing Scope 4 avoided emissions.
InfluenceMap, a London-based trade group and lobby, tracks the potential impact of policy interventions and influencers.
Carrots
Assessing companies according to their spheres of influence could incentivize those that score well to be more climate friendly — providing a positive signal that creates tailwinds for their climate-smart products and services and new investment opportunities. A concrete company testing out zero-carbon materials while completing traditional projects might be encouraged to accelerate its green thrust, for example.
The world must reach net-zero greenhouse gas emissions by 2050 if it is to contain global warming to no more than 1.5°C, as called for in the Paris Agreement.
Furthermore, rewarding companies for what they contribute, rather than chastising them for what they don’t, is a strong carrot. That’s particularly true for entrepreneurs in developing and emerging markets who are being asked to solve an emissions crisis they didn’t create, the authors write.
Carbon accounting and ESG standards are still being sorted. Adding a spheres of influence lens could shed sunlight, Exponential’s Wigg said, especially as one-third of the world’s largest publicly-traded companies haven’t set any net zero targets, according to Net Zero Tracker.
(This story has been updated to clarify that a federal appeals court in March issued a temporary stay on US Securities and Exchange Commission’s rules requiring large companies to disclose their emissions and climate risk in securities filings.)
