With the COP28 Climate Summit once again shining a light on the importance of reducing the world’s reliance on fossil fuels and ending in a deal to transition away from fossil fuels, this has highlighted the ever-growing awareness and requirement to act now in order to meet climate targets.
This requirement is something that many companies are now starting to act on, and as more begin to report their emissions in annual reporting and start to set associated targets, it is important to first understand the terms used in such reporting, as well as potential challenges that are likely to be encountered.
Company emissions statistics are often broken down into the following ‘Scopes’, first established by the Greenhouse Gas Protocol in 2001:
- Scope 1 emissions, being direct greenhouse gas emissions from sources that are controlled or owned by an organisation, such as emissions from fleet vehicles or fuel usage in company generators,
- Scope 2 emissions, being indirect greenhouse gas emissions resulting from purchased energy, such as emissions from the generation of electricity used to power company machinery, and
- Scope 3 emissions, being emissions that are not produced by the company itself but those that it is indirectly responsible for throughout its value chain,
- Total emissions, being the total sum of all Scope 1, 2 and 3 emissions.
However, while recording and reducing Scope 1 and 2 emissions is a relatively straightforward process due to the ability of a company to measure and control usage of associated equipment, Scope 3 emissions are significantly more challenging to quantify and, therefore, reduce. With many companies reporting that the majority of their total emissions come from Scope 3 sources, this presents a significant challenge in reaching emissions reduction goals.
Despite this, although companies do not have a direct ability to reduce the emissions generated through supply chain, there are ways in which companies can influence supplier behaviours. For example, many companies publish Supplier Code of Conduct documents, which lay out certain requirements and expectations of any suppliers working with the company. Many examples often include obligations aimed at addressing supplier environmental behaviours and compliance. For example, considering companies outsourcing manufacturing, it may be stated that any supplier working with such a company must have manufacturing facilities certified to certain environmental management standards, such as ISO14001 and ISO 50001. Certification of such standards indicates that operations follow sound environmental or energy management practices, which then enables the setting of objectives and targets for reducing emissions over time, as well as tracking progress. As a result, this would make it significantly easier for companies to not only audit performance but also use data collected by suppliers for their own Scope 3 emissions calculations.
Companies are also able to influence control in the supply chain through the publishing and implementation of sustainable procurement policies or contracts. Such policies range in complexity, ranging from simply reducing the amount of materials sourced in the first place, therefore reducing emissions, or more often to identify, minimise and manage risk within supply chains. Subsequent supplier selection and utilisation for these policies must be undertaken in line with any agreed procedures. For example, if a company’s procurement policies have a focus on environmental impact, only suppliers who can demonstrate behaviours compliant with company policies are likely to be selected. From a supplier perspective, this is likely to push more suppliers towards certain behaviours in order to secure future business.
In addition to this, increased disclosure requirements are also likely to drive improvements across supply chain data reporting and transparency. For example, significant proposed updates to the Securities and Exchange Commission’s mandatory climate disclosure requirements will see companies not only have to disclose risks that are “reasonably likely to have a material impact on their business, results of operations, or financial condition” but also “to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2),” as well as certain types of GHG emissions “from upstream and downstream activities in its value chain (Scope 3).” In order to comply with such requirements, companies will now require clearer and transparent data from suppliers more than ever to enable the accurate calculation of emissions and, therefore, report true Scope 3 emissions. Other initiatives, such as the Taskforce for Climate-related Financial Disclosures (TCFD) also include requirements for organisations to provide their Scope 1, 2 and 3 emissions, therefore the combination of these type of disclosure requirements will certainly force action upon organisations to standardise their emissions reporting, including their supply chain impact.
To conclude, as global economies begin transitioning away from fossil fuels, clearly the focus of many companies in order to help achieve this goal will be to report and reduce their own carbon footprints. Whilst Scope 1 and 2 emissions reporting and reductions are relatively straightforward, Scope 3 emissions remain a significant challenge not only in terms of the calculation of emissions but also in how companies can take steps to reduce these emissions. With many companies reporting that the majority of their emissions originate from Scope 3 sources, clearly this presents a significant challenge. However, with companies now publishing Codes and Procurement Policies aimed at influencing supplier behaviours, as well as government-level and financial market disclosure requirements being introduced to force change in many organisations, it is surely only a matter of time before an increase in transparency and accuracy of Scope 3 data comes to fruition. Despite this, Scope 3 remains a significant challenge to organisations, but with a light now being shone in this area, this can only be a good thing when it comes to clarifying and simplifying such a complex issue.
Article originally published by Landmark Information Group.
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