After months of speculation, the Securities and Exchange Commission is set to vote on its highly debated climate disclosure rule on Wednesday. This vote will finally put an end to all the rumors and anticipation surrounding this issue.
If approved, this rule will mandate companies to reveal their greenhouse gas emissions, similar to existing requirements in other countries such as the European Union and China. The purpose of this rule is to educate investors about any risks related to climate change or the transition to renewable energy that publicly traded companies may face.
As more and more consumers and regulators push for companies to track and disclose their carbon footprints, a wave of startups specializing in this field have emerged. Depending on the extent to which the SEC enforces the proposed climate disclosure rule, many of these startups could see significant benefits.
Companies typically report their greenhouse gas emissions in three categories: Scope 1, Scope 2, and Scope 3. Scope 1 refers to emissions directly stemming from a company’s operations, such as the burning of coal for industrial purposes. Scope 2 includes purchased energy like electricity, natural gas, or steam. Scope 3 encompasses all other emissions, usually resulting from the activities of a company’s supply chain.
The category of Scope 3 emissions is the broadest, and if mandatory reporting is required by the SEC, it could have far-reaching implications beyond just publicly traded companies. Some companies, including Walmart and ExxonMobil, have publicly expressed their opposition to reporting on Scope 3 emissions and it is likely that this requirement will not be included in the final draft, as reported by Reuters. On the other hand, companies like Amazon, Ralph Lauren, and Chevron have stated their support for disclosing Scope 3 emissions.
If the SEC’s final draft does not include any requirements for reporting on Scope 3 emissions, the remaining Scope 1 and Scope 2 emissions would still represent a significant portion of the U.S.’s overall carbon footprint. This would likely compel companies to improve their current reporting processes, leading many to seek assistance from external sources. Here are several potential options they may turn to:
- Arcadia
- Watershed
- Planet FWD
- CarbonChain
- Bend
Arcadia, a climate-tech unicorn, has spent years gathering data on electricity-related emissions from households, companies, and utilities. In 2022, it announced a partnership with Salesforce to incorporate its Data Connector product into the SaaS giant’s Net Zero Cloud offering. This product is compatible with 9,500 utilities and energy providers in 52 countries, enabling companies to automatically track their Scope 2 emissions and generate auditable reports. With its focus on Scope 2 emissions, Arcadia is well-positioned to benefit from the SEC’s new rules.
Arcadia has raised over $575 million and currently holds a post-money valuation of $1.5 billion according to PitchBook. In the event that the IPO market opens up, Arcadia could potentially become one of the first climate tech companies to go public.
Another climate-tech unicorn, Watershed specializes in managing emissions across all scopes, with a particular focus on financial institutions, consumer goods companies, and those seeking to reduce their Scope 3 footprint. The company has raised $210 million and currently has a post-money valuation of $1.7 billion, as reported by PitchBook. This valuation may entice investors to push for an IPO. Watershed has attracted prominent backers such as Sequoia, Kleiner Perkins, and Lowercarbon.
Originally founded to sell carbon-neutral, organic crackers, Planet FWD shifted its focus to designing a platform for assessing carbon emissions after realizing the challenges involved in measuring, reducing, and offsetting its own product’s carbon footprint. The result was a carbon assessment platform tailored to the needs of consumer goods companies, especially those in the food industry. The startup secured $10 million in a Series A funding round in 2022, and has a post-money valuation of $40 million, as reported by PitchBook.
CarbonChain stands out for its detailed approach. Last year, the startup raised $10 million in a Series A funding round, having spent several years collecting data that covers 80% of the world’s emissions. How did they achieve this? By gathering information directly and working with companies in the world’s most polluting industries. The founders, who have worked on oil and gas projects, are well-versed in these industries. The startup partners with lenders and insurers to secure discounted rates for its customers. These financial institutions are willing to make such arrangements because the data shows that low-carbon assets tend to have lower operating costs.
Corporate spend was a popular investment trend for a while, attracting billions of dollars in capital. As the sector matured, specialization was inevitable. Thus, we have Bend – a corporate spend startup that focuses not only on tracking expenses but also on carbon emissions. It secured $2.5 million in a seed funding round last year. Bend launched its subscription-based API that allows companies to expedite their carbon accounting processes, but it quickly changed course and now offers a corporate spend card that includes carbon accounting for free. It’s a clever move that will help companies of all sizes get a better handle on their emissions.
Driving forces
Regulatory activity isn’t the only catalyst behind the surge of these startups. As AI technology advances, these startups have been able to use it to provide more accurate reports of Scope 3 emissions, which are often difficult to estimate due to data gaps. As companies continue to refine their AI methods, we can expect Scope 3 estimates to improve, potentially alleviating some of the opposition to mandatory reporting on such a large scale. Some companies have already embraced Scope 3 reporting, using transparency as a selling point.
Even if government policies change and requirements are loosened, some level of carbon accounting will likely be integrated into developed economies in the near future, if it hasn’t already. The question isn’t whether companies will have to report, but how much they will have to disclose.
For startups that simplify this process, questions and uncertainties only translate into more opportunities.
