Spectrum of transparency
More rigorous transparency regulations for negative externalities to force companies to measure, and reduce.
The common theme across my recent writing on IT energy is the lack of transparency and data for accurately assessing environmental impact. Whether you are trying to calculate the emissions of your cloud computing infrastructure or comparing the most sustainable laptops, vendors need to publish the data behind their operations and products.
When you look into who is reporting what, the surprising thing is that many companies are already doing a lot. However, there is a wide spectrum of detail when it comes to that transparency.
The most transparent
In the EU, big, public companies are legally required to publish annual non-financial statements. Directive 2014/95/EU applies to public-interest companies with more than 500 people, including listed companies, banks, insurance companies and other specially designated public-interest entities.
Some of these companies are doing this because they have to, but you can see from some reports the companies that take this seriously. They make it a core part of their operations. These are the ones that have set Science Based Targets for emissions reductions, ideally net zero goals, and have formal programs with clear progress towards the all reporting requirements: environment, social responsibility, human rights, anti-corruption and diversity.
I was impressed with the depth and scope in Sony’s latest report, which they have been publishing since 1994 (although in different formats). You can start to get a sense of the work that goes into these reports just by flicking through the data charts. Having an organisation-wide diagram explaining the environmental impact of all operations is impressive:
The least transparent
Most companies report nothing at all. Whether it is a big gaming company like Roblox, a media site like Ladbible or an ecommerce store like Gear4Music, these companies completely ignore their responsibilities.
The reason the EU requires detail from the largest companies is because they are important factors for the analysis of risk. Financial reporting helps evaluate past performance and make a judgement about future possibilities. Investors need information about the environmental, social and human-rights risks just as much as they need financial information. But it is not just investors who want to know how a company impacts the world — everyone should care about that.
Smaller, private firms arguably have fewer resources to be able to report in the same level of depth as public companies, so they could be required to report in less detail. But just because you are a small company does not mean you have zero impact. 60% of consumers will buy or boycott a brand based on these types of important issues, and 64% say that brands need to make this information available before they buy. This should all be to the benefit of the disclosing company?
Somewhere in the middle
In-between the two extremes of the transparency spectrum, we have companies that sit somewhere in the middle. These are the companies such as Boden and The White Company, who claim to care about their corporate responsibilities, even having dedicated sections on their website, but disclose very little of value. They’re not small companies either, with Boden turning over almost £400m and The White Company over £200m.
Another type of company in the middle is one that fails to disclose important metrics. For example, Greenhouse Gas emissions fall into three scopes. Scope 1 are generated directly e.g. through a diesel generator, Scope 2 are indirect through the purchase of electricity, and Scope 3 are all other emissions, e.g. business travel and emissions from your suppliers.
Only Scope 1 & Scope 2 are mandatory to disclose but for many companies, Scope 3 is where the majority of their emissions are. As an example, both Adidas and Nike disclose their GHG emissions in detailed reports. Both companies produce similar products and have extensive, global supply chains. However, Adidas does not disclose Scope 3 whereas Nike does:
Note how 98% of Nike’s emissions come under Scope 3. It is great to see Adidas commit to being carbon neutral but without measuring Scope 3, that commitment is meaningless.
Unless you run power planets or consume huge amounts of electricity directly in facilities you own, not reporting Scope 3 emissions is simply a way to hide the majority of your emissions.
I am generally against detailed government regulation. Free markets with effective competition are the most efficient way to run economies. Governments should set some rules, and enforce them, but should otherwise not engage in active industrial strategy. Transparency should be one of those rules.
One of the problems of free markets is correctly pricing negative externalities. Introducing more rigorous transparency requirements for the areas that are typically considered externalities is one way to force companies to at least measure, and eventually reduce them.
With freedom of information, the mechanisms of a democratic society (the press and courts) apply scrutiny to the government. The same principle applies to the private sector. When you have transparency, and consistent reporting, market forces work better.
Originally published at https://davidmytton.blog on October 19, 2020.