In this second part of our Energy Transition Talks podcast on environmental sustainability, CGI experts Nicole Zethelius, Rich Hampshire and Peter Warren discussing energy and utility companies’ need to invest in collecting relevant environmental, social and governance (ESG) data to ensure accountability, transparency and auditability, and to deliver business growth. This article provides a summary of the discussion. Listen to part one of this podcast.
Data is a key enabler to trace and measure environmental sustainability-related factors across Scopes 1 through 3 as defined by the Greenhouse Gas (GHG) Protocol, from energy and resource use to GHG to supply chain performance. However, while energy companies and utilities are rich in data, they aren't necessarily tracking the relevant ESG data throughout their digital value chains to take measurable, transparent and traceable actions.
The imperative to reduce Scope 3 emissions
The three scopes defined by the GHG Protocol are:
- Scope 1: Direct emissions from company-owned and controlled resources, which include a company's headquarters and purchased vehicles used to get to and from office premises.
- Scope 2: Indirect emissions from the generation of purchased energy, including heating, ventilation and air conditioning.
- Scope 3: All other indirect emissions from activities not owned or controlled.
The importance of Scope 3 emissions is growing. Nicole explains that such emissions account for anywhere between 70-90% of a business's operations. "It's their supply chain, lease assets, investments and logistics. It's everything that is relevant to what's driving ESG and what's driving negative environmental impact," she says.
Delivering clean energy, transparently
Energy and utilities companies have several sustainability roles and responsibilities. They must lower their GHG emissions, advance the adoption of green energy, and trace green energy from production through to use.
"It boils down to accountability. All of this reporting and the framework when it comes to ESG is relevant because we're starting to make financial decisions based on this non-financial disclosure and information," says Nicole.
Rich agrees. "Whether it's accountability or auditability, I think there is absolutely a need for people to have confidence that what they are paying for is what they have contracted for."
Access to relevant data is critical
Increasingly, financial institutions are starting to consider organizations' exposure to climate risk and how sustainable they are when making risk assessment and investment decisions.
"[This] is going to be very, very powerful, in my view, at driving corporate behaviors and taking this area extremely seriously. Because, ultimately, it's going to go to the cost of doing business. It's going to go to the cost of capital," says Rich.
Global initiatives such as the Task Force on Climate-Related Financial Disclosures (TCFD) and the work around the EU taxonomy for sustainability will impact corporate behavior and the strategic focus of organizations. However, Rich says that financial institutions must have access to relevant auditable, traceable and accurate data for these assessments to be fair.
Accuracy is paramount, adds Nicole. However, one of the challenges is that investment firms and financial institutions base decisions around their ESG investments from rating agencies, but there is no mechanism to validate what companies can disclose to these rating agencies. The existence of over 200 ESG rating agencies and more than 2000 indicators adds to the complexity.
ESG and risk management
"Accountability starts from the financial sector," says Nicole. Cultural values and the political and economic nuances and interests of various geographies play an important role. "It's also [about] understanding regional relevance in these conversations. It boils down to risks and risk probability and predictions, and how we use analytics and business intelligence mechanisms to measure these risks and make preventive decisions before they happen."
Using game theory to address environmental sustainability
Nicole observes that game theory can be applied to unlock the business value of sustainability. "The key takeaway when you connect sustainability and game theory principles is looking at [the fact that] we can never guarantee what our competitors are going to do. We need to be aware of what we're doing and understand our operations much more clearly, now more than ever." She says that this is particularly important because there's been a lot of greenwashing due to decentralization. Relevant, insightful and actionable environmental sustainability data will help companies demonstrate responsible business practices.
Building reputation and securing trust among customers and employees
From whom customers choose to buy services or products ultimately is determined by an organization's reputation and customer trust. How can organizations secure this trust? "It comes down to being able to evidence it, which brings us back full circle to data and having confidence … that the data is accurate," says Rich.
"In part, reputation is also a company's responsibility to their employees," Nicole adds. She says that energy companies and utilities employ an enormous number of people globally. The key to modernizing and becoming a better company is knowing what you are doing, providing transparent data, and acknowledging that it is a journey of continuous improvement. It's essential, she summarizes, not to hold onto every trending ideology.
Read the transcript:
- Chapter 1: Introducing Scopes 1, 2 and 3
Hello everybody and welcome back to the second part of our two-part series on energy sustainability. We’ll be picking up our conversation where we left off with both Rich and Nicole.
It's interesting when you look at the ESG scopes one, two and three [of the Greenhouse Gas Protocol], maybe Nicole can give us a crash course on that. What you described had all of those elements in it. It's the primary product, it's the environment around the system to do it, and then it's the full supply chain. Nicole, what's your thought on that? Because utilities are rich in data, but usually not data for those purposes.
Yes, and they need to be, or they will be, if we look at so many different industries in the "cancel culture," in general, and looking at how social media and access to information have given this capability to actually make huge decisions. We saw that in the stock markets during the pandemic, how buying power can really change, but it all boils down to information here. When it comes to scopes one, two and three, just in case our listeners aren't aware of this, this is developed through the Greenhouse Gas Protocol.
Scope one is all of the direct emissions a company makes. That's their headquarters, their purchased vehicles to get to and from the office. Scope two is all of the purchased electricity and utilities that the company uses, including HVAC. So, heating, ventilation and air conditioning are also included in scope two. Scope three is about, it could be anywhere from 70% to 90% of the business' operations. It's their supply chain, their leased assets, their investments, their logistics, pretty much everything. As I said, it's the energy that's used from the suppliers and the vendors, and all of the other interactions that a company makes. So, it's everything that is actually relevant to what's driving ESG, and what's driving environmental impact, negative impact.
- Chapter 2: Accountability
So, utilities and energy companies, oil and gas, etc., as we go through this transition, have a dual role. They are the foundation of somebody else's product. So, if they make greener energy, therefore somebody can claim their steel is greener, that type of scenario. One of our client partners is actually looking to use the ESG as a differentiator in their competitive electrical market to actually say their electrons, "I can prove it," are cleaner than somebody else's, and here's the math to do so. Therefore, buy mine rather than theirs. So, there are some first movers that are doing this in this area, but how do you see, for either one of you, the dichotomy of, "I'm a producer of energy, but also I have to report to the people that use it, how good or bad it is." How do you guys see that?
This is about accountability, isn't it? If you're selling green energy, you need to be able to prove you're selling green energy. Wouldn't you say that Rich? You don't want to have bad actors in this whole process of transitioning to green energy. Are we producing enough green energy? This is another question. Rich mentioned nuclear energy. I'm a fan of nuclear energy, I'll come out and say that. But the reason why is because it's so abundant, and it's a very low-carbon, clean source of energy. Until we can scale up some of the better solutions, we need to think about the amount and the quantity that is required in order to run society, and in order to make energy affordable. And this is a solution that we have today. I'm not saying it's the endpoint. I just think that it's something that we should consider in the decision-making process. But, yes, it boils down to accountability. All of this reporting, the framework when it comes to ESG, why it's so relevant, is because we're starting to make financial decisions based on this non-financial disclosure and information.
I agree completely, whether it's accountability or auditability, I think there is absolutely a need for people to have confidence that what they are paying for is what they have contracted for. So, being able to trace low-carbon energy from production through to use is vitally important. It's equally important for us as a consumer of energy, and a large consumer of energy, through our data centers. Whilst you were talking, Nicole, I think one of the things that was running through my mind is, we are effectively part of our clients' supply chains. Therefore, it should be no surprise that our clients are looking at us for assurance that what we are doing is environmentally sound, is sustainable, and is ESG compliant. So, I think globally, our corporate commitment to net-zero is important to giving that confidence. In the UK, we've agreed on science-based targets in how we are going to achieve net-zero. We've had very, very positive feedback from our clients that we're taking such a proactive stance.
- Chapter 3: Financial risk assessment
Yeah, it's an interesting one because, in our conversations with our banking counterparts, there are whole portfolios shifting to only things that they consider are ESG friendly, as things they will finance and fund, or invest in. So, the financial industry is almost becoming the policeman, even if regulation isn't there. I know there's a lot of regulation, Rich, you're kind of an expert on regulation, but maybe you could touch on regulation investment. I think one more subject that you guys brought up was gamification. How do you see this all coming into how we could shift this forward? So, I kick that over to you. That's a bit of a mouthful.
So, the whole area of finance and the financial risk assessments starting to take account of exposure to climate risk, and how sustainable organizations are, is going to be very, very powerful, in my view, at driving corporate behaviors and taking this area extremely seriously. Because, ultimately, it's going to go to the cost of doing business. It's going to go to the cost of capital. So, initiatives at a global level like TCFD, the Task Force for Climate-Related Financial Disclosure, the work that's going on in the EU taxonomy, all of these things, I think, are going to start to impact corporate behavior, the strategic focus of organizations. Of course, if those assessments are to be fair, then it brings us back to making sure that those doing the assessments, the financial institutions, have got access to appropriate data that they can have confidence in, that is auditable and traceable, and that is actually accurate. Nicole, I'd be interested in your thoughts.
Yes, I 100% agree about the accuracy. I think one of the challenges that we face today is that investment firms and financial institutions are basing decisions around their ESG investments coming from the same rating agencies that were part of subprime mortgage disasters. Is that the best solution?
Is that the best way to uptake this new source of data? I'm not quite certain about that, especially because there's no mechanism for validation of what companies can disclose to these rating agencies. There are over 200 of them and there are over 2,000 indicators around ESG alone, and that becomes extremely obscure. You almost need mass litigation just to understand it, not only sustainability and ESG controllers and experts, but also those that know how to weed through a massive amount of data and information.
If we look at the relevance to it, in regards to taxonomy, they've gotten smart in the sense that they are chasing the money trail first. The accountability starts from the financial sector, and looking at the investments that the banking industry makes and that other financial institutions make, and seeing just how dense it is in terms of environmental impact. That's an important start. I see it obviously trending along the way going into other parts of the globe, but we have to remember that it is also relevance. If we look at India, for instance, water is at the top of the priorities. Whereas in Europe, we are talking a lot about greenhouse gas emissions. So, it's also understanding regional relevance in all of this conversation. And it boils down to risks and risk probability, risk predictions, and how do we use mechanisms of analytics and business intelligence to be able to measure these risks and make decisions before they happen, preventative in that case.
I totally agree with you on that. I had a conversation with our guys that do risk management and they want to do another seminar, another event, having nothing to do with traditional oil and gas, and utility risks. Will it burn, will it not run, and so on. It has everything to do with financial ESG risk management because that's now one of the new areas they're starting to consult people on. That's another area that is needing to be added. I don't know that everybody has that on their portfolio. Rich, do you see this being a point of conversation with your clients?
I think it's starting to increasingly become one, certainly from what we're seeing, both from the UK government, in terms of their demanding this as a prequalification for bidding for contracts, but also our clients asking much more searching questions about us as a supply chain partner and what our approaches are to this question. So, the short answer is probably yes.
- Chapter 4: Game theory and sustainability
We got a little dark and deep on that part. So, let's shift to more of a fun thing, the game-theoretical principle.
Game theory is the Nobel prize-winning economic mathematic theory about how we can never guarantee what our opponents are doing. We have multiple stakeholders and opponents, and there are multiple scenarios that can occur, and we need to hedge our bets. I think the key takeaway when you connect sustainability and game theory principles is looking at we can never guarantee what our competitors are going to do. We need to be aware of what we're doing and understand our operations much more clearly, now more than ever. We talk a lot about the differentiation between decentralization and centralization. There's been a lot of greenwashing around this area because companies have decentralized so much that they don't know what the left arm is doing and the right foot, it's all over the place.
That has now come to light. This is one of the biggest trends is that, as a Gen Zer might say, "Show me the receipts." That means that if you're going to say something, you need to prove it. You need to prove it, not just from what you say, but also the data around that, that validates what you say around sustainability, around an operation. What the activity is that a company does. And this will play a huge part because the more granular we get on our buying power, and I don't know how it works for you, but I see in Sweden here, in Stockholm, it's very particular about the origins of things. You want to know exactly where your meat comes from, and in what region, you want to know where your dairy comes from.
I think it's also in part EU legislation, but you will know exactly where all produce and everything comes from, as well as your consumer products. So, if we get down to that granular level and that expectation of society, we will need to eventually provide, almost like nutrition facts, to our consumers and our businesses in terms of environmental and social impact. We are now in the phase where greenwashing has happened quite a lot in the last 10 years, and now it needs to be mitigated by one, regulation, and two, being able to prove that you're not doing it. This is where data really plays its part. Then actionable, how do we utilize this data in the best way to lower things, but when it comes to game-theoretical principle, it's always that we see big companies making divestments around carbon, and they need to be asking themselves is this the best solution, because their competitor might come in and sweep up, and buy whatever they divested and do a worse job than the company who divested did.
We need to look at it from a long-term perspective and be really smart about it, and not just look at the whole entire, oh, the utilities industry is emitting this much and we need to get rid of everything all at once. It doesn't work that way. It needs to be gradual and it needs to be responsible in the way that we make these decisions, economically. We mustn't forget. The economy is a big, important part.
- Chapter 5: Individual and organizational actions
Good thoughts on that. Maybe some final thoughts as we wrap up here.
Yeah. I agree. I think there are a couple of interesting things in what Nicole has talked about. One is our response as individuals and who we choose to give our money to for buying services or for buying products. That ultimately goes to the organization's reputation and our trust in them. How do they prove that, how do they secure that trust? That comes down to being able to evidence it, which brings us back, and brings us full circle to data and having confidence in the regulation that the data is accurate. It's giving an accurate representation of the impact of those organizations. So, I think there is a piece here around us as consumers, our expectations, our behaviors, but also what that's going to mean in terms of the increasing importance of organizations' reputations, in order to secure our business.
Very good point.
Cool. How would you respond to that, and maybe some wrap-up thoughts from you?
I think that's an excellent point. In part, reputation is also a company's responsibility to their employees. We look at utilities companies, we look at oil and gas. They have a huge responsibility of employing an enormous amount of people, globally. If we put pressure to do everything on the UN Sustainable Development Goals (SDGs) charts, they're not going to hit all marks. No company really can hit all marks. But what I think that companies can do to become more modernized and better companies, is to know what they're doing, to provide data that is transparent enough, but carefully, and say like, "Okay, this is how we operate. We are on our way to becoming cleaner, with continuous improvement." If I were to give advice to our clients and the audience it is that you should know what your competitors are doing in terms of sustainability in ESG.
You should keep up with that pace. You shouldn't be far behind. You should either be leading or with the pack. Keep up with regulation and look at the risks that are related to this, because there are a great deal of risks that are connected to assets and to revenue. So, just to look at it from a different perspective and not hold onto every trending ideology that comes up, because that's where the obscurity occurs. You need to remember what is relevant for a company, and what a company can do, and has no actionable way to do. That's my wrap-up and advice to take away from this.
Well, thank you for that. Thank you to both of you. I think that I heard a quote the other day that the difference between ethical and moral ethics is knowing what's right and wrong. Morality is doing it. As companies go into this new world and their brand, their association, their end product, as it goes into the supply chain, their morality on how they approach this, honestly and openly, is going to be a key one. And all the things about data and risk that we discussed today are the key factors.
So, I'd like to thank you both, wrap it up there, and we will talk to you all again on the next one. Appreciate you. Bye-bye.
Thanks a lot. Bye-bye.