Weigh Pros and Cons of Switching from Scope 2 Location to Market-based Reporting Method

As sustainability regulations and standards continue to evolve rapidly, a diverse array of reporting methods remains acceptable. The optimal approach hinges on a blend of industry norms, customer requirements, and company objectives.?

Switching from one reporting method to another may initially seem straightforward but warrants caution. The Greenhouse Gas Protocol standard , commonly used for reporting Science-based Target Initiative 's science-based targets (SBTs), mandates substantial adjustments when transitioning Scope 2 reporting from location-based to market-based methods. These adjustments include recalculating prior-year greenhouse gas (GHG) inventories and aggregating utility supplier invoices across all company locations.?

While there are tangible benefits to adopting market-based reporting, sustainability teams must effectively communicate both the advantages and disadvantages. This ensures executive teams are well-informed about the associated costs, timing, and risks of the transition.?

Here's a concise overview of the pros and cons involved in transitioning from location-based to market-based reporting:?

Pros?

• Enables renewable energy certificates to reduce scope 2:?Market-based reporting enables the purchase of renewable energy certificates (RECs), from utilities or other?renewable energy attributes, that are usually among the most cost effective?and quickest?approaches to reducing scope 2.?
• Reflects actual actions increasing scope 2 accuracy:?Market-based reporting more accurately reflects?a?company's efforts to reduce its carbon footprint by accounting for emissions factors directly from utilities in which the company purchases electricity.? ?
• Fosters competitive advantage in market:?Market-based reporting can enhance a company's?reputation and attractiveness to stakeholders, including investors, customers, and?employees, by demonstrating a proactive approach to sustainability. More and more the additional effort involved in accounting for and reporting scope 2 via the market-based method is being acknowledged.? ?

Cons?

• Added data requirements and reporting updates:?Location-based reporting requires less?data and enables estimation, making it easier for companies to initiate accounting?practices and receive verification for SBT s. Large multinationals and conglomerates have unique reporting challenges. If your company is comprised of multiple legal entities and/or business groups that are using the location-based method, your existing processes and GHG inventory reporting software will likely need to be updated.?

• Added data management complexity:?Market-based reporting introduces?additional complexity compared to location-based reporting, especially?in terms of tracking and verifying renewable energy purchases and associated?emissions reductions.? ?
• Requires added data inputs from utility suppliers:?Ensuring the accuracy and integrity of?renewable energy purchases and emissions reductions can be challenging,?especially when dealing with multiple suppliers and certification schemes. Further, as reporting becomes more commonplace, the data will likely undergo periodic third-party audit scrutiny.? ?

Consider Scope 2 Emissions Materiality?

Many companies are now conducting materiality analyses to assess whether leveraging the market-based method to report scope 2 emissions provides significant value. While it may be desirable to report all data, the costs can outweigh the benefits. Leaders are wisely opting to refrain from or cease reporting data that doesn't add substantial value to the company and its stakeholders. For instance, an increasing number of companies are discontinuing the reporting of all 15 scope 3 categories. Industries like appliances, where over 89.9% of total GHG emissions are concentrated in scope 3 category 11 (use of sold products) according to research on the most sustainable appliance manufacturers conducted by OrbAid and the University of Michigan’s Erb Institute , are focusing on specific scope 3 categories and key metrics rather than detailed breakdowns of scope 1-15 categories. While transparency is important, if detailed reporting becomes burdensome, leading companies are choosing to prioritize bigger picture cost efficiency and impact potential.?

Reflect on Reporting Methods to Optimize Ongoing Value ?

Teams should pause to consider the pros and cons of reporting scope 2 GHG emissions using either location or market-based methods. This reflection is increasingly important in scope 3 reporting, as boards and investors demand greater transparency into a company’s upstream and downstream GHG emissions and associated risks.?

Ultimately, teams must determine the approach that best suits their needs. Transitioning to market-based reporting for scope 2 emissions can offer a cost-effective strategy for reduction, despite the additional costs and time required to collect, calculate, and report direct utility electric emissions factors. However, this shift necessitates discussions with internal and external stakeholders to effectively choose the best path forward.?