A proposed clean-energy rule could shake up corporate America—and your portfolio
· Fortune
You need to understand what this proposed clean-energy directive might mean for your portfolio – even if you don’t care about sustainability
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A proposed revision to clean-energy accounting guidelines you likely didn’t know existed – from a nonprofit most investors probably never heard of – could have far-reaching implications for your portfolio. Even if you don’t give a hoot about sustainability.
The draft update for how to track greenhouse gases from purchased electricity, called Scope 2 emissions, is from Greenhouse Gas Protocol, or GHG Protocol. And so far, the proposed changes seem to be almost as unpopular as the Washington, DC-based nonprofit’s existing structure is pervasive.
Under the proposed update, companies would only be able to claim credit for clean energy produced during the same hour – and on the same grid – as the fossil fuel-generated electricity being equalized. Currently, GHG Protocol only requires renewable energy to be sourced during the same year, and from a much wider geographic perimeter.
If adopted as written, the impact could be jarring. Almost half of the Global Fortune 500 – including nearly four in five North American companies listed – are pursuing net-zero targets calibrated by the Protocol’s existing yardstick. Without a legacy clause to grandfather existing long-term contracts, the added precision would invalidate more than 90 percent of today’s multibillion-dollar certification market – a move that would trigger a costly, multi-year reset for all but Google, Microsoft and the few utilities, service providers and financiers that already happen to be vested in the chosen methodology.
The accounting change could translate into dramatically lower sustainability scores for some companies. The subpar rankings, in turn, could dramatically limit business prospects. New lower scores, for example, could shut those companies out of doing business in markets with sustainability requirements based on the Protocol. They might also limit opportunities with myriad other firms trying to boost their own scores by prioritizing suppliers and buyers with high sustainability marks.
Not surprisingly, the pushback has been overwhelmingly negative. Late last month, the Protocol released a summary of the more than 1,000 comments it received on the proposed changes, and only 22 percent of all respondents supported hourly matching – including just 12 percent of the 429 companies that answered the question.
Most submissions were submitted privately. But some made their objections public, like the Clean Energy Buyers Association (CEBA), which represents a wide range of buyers and advocates, including tech giants Amazon and Salesforce, retailers Dollar Tree and Lululemon and advocacies like The Nature Conservancy.
In its comments to the GHG Protocol, CEBA said mandatory time and location matching could chase away corporate investors and “undermine the relevance and impact of the Protocol.”
The GHG Protocol working group responsible for updating the electricity emissions accounting methodology is scheduled to meet next month, in no small part to craft a response to the pushback. Many interested parties hope for a compromise that treats the new hourly accounting as optional. They would also like to see a methodology to measure the global impact of clean-energy investments that aren’t on the same grid.
The Accidental Jurist
In many respects, GHG Protocol is a victim of its own success. In 2015, it provided guidelines to a market that was craving structure. The Protocol established a voluntary framework for equalizing fossil fuel-based Scope 2 emissions with renewable energy credits, or RECs. That framework helped fund facilities that have generated more than 260 gigawatts of renewable energy globally.
The Protocol garnered such broad adoption – 97 percent of S&P 500 companies pursuing net-zero targets adhere to the nonprofit’s practices – that organizations that write rules, regulations and certifications started building on top of the methodology.
That’s a problem, because the Scope 2 guidelines don’t provide the accounting-class rigor that rules and regulations require. And the way grids work, they never will.
It would be very satisfying, for example, to document that Manufacturer A did, in fact, replace 100mWh of energy from Fossil Fuel-based Energy Producer C with 100mWh from Clean-Energy Producer D.
It would also be impossible. Electricity doesn’t have provenance, which means it doesn’t stay in its own swim lane. When it enters the grid, it mixes with all the other electricity from all the other sources en route to customers. So there’s nothing to stop emissions-intense electrons from powering a particular assembly line. Even though the manufacturer paid for renewable energy.
Precisely imprecise
Proponents of the proposed Scope 2 update say the added time-and-location precision would help slash opportunistic “greenwashing” – that is, building net-zero claims on the cheap by purchasing bargain-basement renewable energy credits, or RECs, on the spot market.
Critics counter that the revision would be far more disruptive than productive. More than bottom feeders, the new rules also would wipe out investment incentives that helped spark more than 100 gigawatts of renewable capacity in the US. All that without, critics say, materially improving reporting accuracy or, critically, coaxing impactful new investment in sustainable energy.
Indeed, forcing a theoretical connection between credit buyers and sellers could induce inefficiencies in the name of sustainability score-maxxing. A study commissioned by Meta, for example, found the new rules would incentivize the social media giant to invest in cleaner networks like California’s grid operator, CAISO, a region already so well stocked with solar power that, each spring, it invariably produces more energy than it can use. Conversely, the new rules would also lean Meta away from renewables investments in MISO, the midcontinent grid, where coal still generates 30 percent of electricity.
There is a framework being developed in parallel to recognize the global greater-good dimension. But the framework, called Actions and Market Instruments, or AMI, is being developed as a complementary metric that, as of now, won’t be part of the core Scope 2 accounting.
Wrong direction?
In addition to being unpopular, timing is poor for imposing onerous new requirements. Certification bodies and government stakeholders – constituencies that typically favor precision – are trending in the opposite direction, choosing flexibility over rigidity in the face of political headwinds.
In June, for example, the Science-Based Target initiative, or SBTi, perhaps GHG Protocol’s greatest partner and advocate, released Version 2 of its highly influential Corporate Net Zero Standard. SBTi included hourly matching in the revised Scope 2 targets, but only as part of an optional “voluntary recognition” program. For the longer term, the organization thus far has committed only to study the effectiveness of hourly matching.
California and European Union regulators also delayed reporting updates.
Bottom line
GHG Protocol had the foresight 11 years ago to build a framework with just the right mix of structure and flexibility to launch a market that has led to cleaner, more secure sources of energy. And when all is said and done, I suspect the Protocol will unveil an update with options that include both time-and-location matching and consequential-impact reporting – along with a runway for legacy investments to help avoid an even greater disruption.
It had better. Because if the Protocol upends the REC market with precisely imprecise requirements almost no one is ready to meet, investors will be able to compute the hit to companies’ bottom line. With a precision the Protocol can’t hope to match.
Mike Feibus is president and principal analyst of FeibusTech, a Scottsdale, Arizona, market research and consulting firm. He covers the business of sustainability from myriad angles, including transportation, packaging and the carbon-credit market as well as Scope 2 accounting. Reach him at [email protected]. Follow him on X at @MikeFeibus
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