Across corporate ESG efforts, climate action remains a top priority. While many of the carbon trends we highlighted in 2023 are just as relevant now, the year ahead carries with it a different momentum and area of focus. Regulation and target-setting frameworks took a big leap forward in 2023, paving the path for what we expect to be a very busy and exciting year ahead in climate action with a huge focus on data, data, data. Let’s dive in.
#1: GHG ACCOUNTING TAKES A COMPLIANCE MINDSET
Fasten your seatbelts, the acronyms are on their way! While the U.S. SEC’s proposed climate rules remain on pause (Update: they’ve been finalized! Here’s what you need to know and what action to take next to set your organization up for successful disclosure.), other regulatory efforts have moved ahead. Notably, California’s Climate Accountability Package, consisting of senate bills 253 and 261 and signed into law in Fall 2023, mandates comprehensive climate-related disclosures for large corporations beginning in 2026 (although proposed cuts to the state budget may delay implementation). Many companies that were waiting for a cue from the SEC now find themselves subject to California laws and on a relatively tight timeframe. Given this reality, and the indication of a final SEC ruling later this year, we see 2024 as the year that greenhouse gas (GHG) accounting shifts from a voluntary to a compliance mindset in the U.S.
Outside the U.S., 2024 marks the first in-scope data year for companies who will be reporting in alignment with the European Sustainability Reporting Standards (ESRS) beginning in 2025. The reporting requirements, which are much broader than those covered in the recent laws passed by California and proposed by the SEC, are moving full steam ahead, impacting EU and non-EU businesses alike in 2024 and beyond.
Given these looming regulatory timelines, we expect to see more first-time GHG inventories, higher value placed on accounting transparency and documentation, and preparation and undertaking of third-party assurance. In an exciting turn toward increased cross-functional collaboration, we also expect to see more engagement between corporate risk, finance, and sustainability departments; environmental, social, and governance (ESG) legal providers; and GHG accounting and reporting service providers.
#2: MEASUREMENT, REPORTING, AND VERIFICATION (MRV) IS HERE
Continuing the focus on data management and disclosure, we expect amplified interest in data management and analysis of performance-based metrics linked to science-based and net zero targets. While standards for the accounting and reporting of historic GHG emissions are well-established, no such similarly detailed standards exist for analyzing and reporting performance relative to climate targets.
In November 2023, the Science Based Targets Initiative (SBTi) and EY published a Landscape Analysis of Measurement and Reporting of Science-Based Targets. The report acknowledges that “reliance on self-reporting of progress and the absence of standardized guidance has led to widespread inconsistencies.” Even though reporting on progress each year is a requirement for companies who set targets through the SBTi, “only half of all companies with approved science-based targets are reporting progress on all of their near-term and long-term climate targets.”
The SBTi, the Greenhouse Gas Protocol (GHGP), and leading disclosure and regulatory bodies have or will soon be incorporating performance metrics into their requirements and guidance. This year, we expect to see published guidance from the SBTi, as well as aligned and detailed draft guidance from the GHGP on the measurement, reporting, and verification (MRV) of progress-based metrics.
#3: COMPREHENSIVE RISK ASSESSMENTS ARE A MUST
Analysis and disclosure of climate-related financial risk is a relatively recent practice compared to traditional Scope 1-3 GHG accounting and reporting. Regulation, however, has quickly raised the profile of climate risk and the necessity of comprehensive risk assessments and robust risk management practices, both of which take time to design and implement. Many companies are behind the curve, with those that have undertaken risk assessments often focused on physical risk alone.
We expect to see big investment in 2024 to prepare for compliance with new regulation such as California’s Climate-Related Financial Risk Act (SB261), which leverages the framework and guidance established by the Task Force for Climate Related Financial Disclosures (TCFD) and is anticipated to impact roughly 10,000 companies.
Note: For those pursuing climate risk initiatives in 2024, you’ll have to update your acronyms rolodex. The TCFD disbanded in late 2023, with the monitoring and progress of these disclosures now governed by the International Financial Reporting Standards (IFRS) Foundation
#4: DECARBONIZATION MOVES FARTHER AND FASTER
In a promising trend toward large-scale impact, we expect to see more leaders work to scale decarbonization efforts across their organizations, moving on from the simple, low-hanging fruit to larger capital outlays and new standards across their portfolios. As one example, the County of San Diego, a decarbonization leader in the public sector, is now several years into implementing its Zero Carbon Portfolio Plan and is focusing on electrifying its building stock. Stok continues to work with the County to conduct electrification feasibility studies across prioritized facilities and to quantify potential GHG savings. To navigate funding, the County is spreading these capital projects out between now and 2030.
While some organizations have well-established and detailed decarbonization plans with dedicated budgets, many do not. To optimize the cost and timeline required to learn about and scale new decarbonization efforts, many companies in 2024 will leverage pilot project outcomes to develop initial portfolio-wide standards. Within the real estate sector, we expect to see this approach applied most to embodied carbon. Stok is currently working with clients to use iterative whole building life cycle assessments (WBLCAs) to drive decision-making around low-carbon design and materials selection for new construction and adaptive reuse projects. Learnings from building-level assessments will then be used to inform the creation of new development standards and sustainable procurement practices at the corporate level.
#5: ACCOUNTING STANDARDS EVOLVE
The greenhouse gas protocol (GHGP), the definitive guide for GHG accounting, will be undergoing updates in 2024, following global stakeholder engagement conducted in late 2022 and 2023. Updates will be made across the full suite of corporate standards and technical guidance to reflect the many important developments that have occurred since the standards and guidance were originally published.
With GHG accounting now seen through a compliance lens, and with the indication that updates to the GHGP will be wide-reaching and material, we expect to see a lot of discussion around the update process as companies anticipate what the changes may be and look to adapt their accounting practices accordingly. We expect to see drafts of updated standards and guidance released later this year, with final standards and guidance published in 2025. See here for more on the GHGP Standards and Guidance Update Process.
#6: IN THE VCM, MOST BUYERS WAIT FOR GLOBAL INTEGRITY STANDARDS
This year we expect to continue to see corporate buyers shy away from the voluntary carbon market (VCM) due to negative media coverage and concerns over quality. As a result, the avoidance and reduction market will stagnate while quality-oriented removals expand, driven by a small set of corporate leaders such as the members of the Frontier Buyers Club who are willing to make advanced market commitments. For the few corporates considering large forward purchases, we expect to see increased collaboration with the growing ecosystem of service providers focused on due diligence and risk mitigation, such as carbon ratings agencies and insurance providers. Outside of corporate purchasing trends, we’ll see independent standards bodies make strides in establishing standardized frameworks to ensure high-quality carbon credit supply in future years, with the hope of coaxing hesitant corporate buyers (back) into the market in 2025.
For more on carbon credits and the VCM, see Stok’s Carbon Credits FAQ Part 1 and 2.
While “data, data, data” may be an intimidating theme to some, we expect these changes in standards, best practices, and regulations to ultimately bring much-needed clarity, consistency, and credibility to corporate climate action globally while investments in decarbonization scale up. No matter what stage you’re at in your organization’s climate journey, Stok’s carbon experts are here to help you navigate the ever-evolving landscape. Reach out to discuss your project or portfolio.
