When it comes to companies vowing to slash their carbon footprints, it turns out that most “net zero” pledges add up to quite a bit more. In their annual corporate climate responsibility report published in February, the New Climate Institute and Carbon Market Watch analyzed the plans of 25 corporate giants and found the vast majority haven’t disclosed the entirety of the emissions they’re responsible for or detailed plans to reduce them. The main culprit is so-called “scope 3” emissions, which pertain to indirect emissions that are not under their direct control but exist elsewhere in their value chains, comprising a whopping 87% of their emissions. “The real elephant in the room is: How do we start tackling scope 3?” asks Lior Keet, managing director of emerging technology for EY.
The C-suite executive best prepared to grapple with this challenge is also perhaps the most unlikely: the CIO. Given pandemic-era pressures to digitally overhaul their operations, large swaths of organizations have effervesced into the cloud—which now has a larger carbon footprint than pre-pandemic air travel, according to The Shift Project. Several public cloud providers like AWS have drafted their own net-zero strategies. Public companies, however, should not just leverage them but also create their own as investors and regulators alike are clamoring for clear goals and reporting when it comes to ESG (environmental, social, and corporate governance). CIOs have a critical role to play in not only determining the full scope of these third-party emissions, but also in creating the metrics, partnerships, and mechanisms needed to zero them out.
The scope-3 loophole was bound to close eventually, entangling CIOs who’ve led successful digital transformation efforts premised on a wholesale migration from internally maintained systems to third-party clouds. “If I’m outsourcing any aspect of my IT environment, I need to be confident in my ESG reporting to Wall Street,” says Marsha Reppy, technology consulting partner at EY. “You’ve got to consider the entire ecosystem.”
Regulators are aggressively moving forward. The SEC has clearly signaled its intention to add teeth to climate-related disclosure, and Reppy says it’s simply a matter of time before public companies are required to publish airtight climate accounting similar to the financial mandates put in place by the Sarbanes-Oxley Act (which established financial record-keeping and reporting practices) 20 years ago. “It’s important for CIOs to understand that whether they’re providing or receiving these services, they have significant changes and requirements headed their way,” Reppy emphasizes. The question now is how best to get ahead of that.
While regulators are inclined to wield sticks, CIOs are better served by offering their partners carrots for cooperation instead. The reasons for this are twofold. First, in the absence of clear information, companies will be inclined to account more conservatively for their suppliers’ emissions, thus raising costs up and down value chains when it comes to purchasing carbon credits today or paying carbon taxes tomorrow. Conversely, the more members of a given value chain share data, the lower those costs will be. “The biggest challenge with scope 3,” Keet says, “is how do you get that data, and how do you incentivize third parties to share it with your organization?”
A seemingly paradoxical answer is blockchain technology, which, through cryptocurrency, is better known for increasing energy consumption than reducing it. But blockchain’s ability to build a shared, transparent, immutable ledger has immense potential for recording and rewarding stakeholders with “tokens” in exchange for their data. “If you tokenize the data, you can start thinking creatively about how to exchange carbon credits more efficiently,” Keet says. “CIOs should ask themselves, ‘How do I exchange value?’ versus simply exchanging data.”
To that end, EY has built blockchain-based reporting systems on behalf of clients in both the energy and petrochemicals industries, both of which are hard-pressed to rapidly reduce emissions. For the former, the firm helped create a formal system of capturing emissions data at the point of origin for one of its major business units using cloud solutions. And for the latter, EY designed a new blockchain-based protocol to track recycled feedstock, renewable energy use, and targeted reduction of outputs, among other criteria.
In both cases, the goal was to build a framework for future cross-firm collaboration. For example, someday EY clients might assemble and organize their own decentralized autonomous organization, or DAO, to create a social governance community with its own rules and standards for sharing data and trading tokens. “There’s a huge opportunity here to simplify exchanges between firms,” Keet says.
Regardless of whether blockchains are the solution, it’s clear CIOs are in the driver’s seat when it comes to mapping the web of dependencies that makes true climate accounting such a formidable challenge. As companies come to grips with the extent of scope 3 emissions, it’s critical to understand the importance of the ecosystem on the value chain and work with their partners to clearly establish the right way forward.
The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.