Commentary

Time to Grasp the Nettle on Scope 3

Stuart Lemmon, Northern Europe MD at EcoAct, an Atos company, says firms must respond to investor calls for action on value chain emissions.

A feeling of urgency surrounded the recent UN Climate Change Summit (COP26), however despite some significant progress made in Glasgow, more needs to be done. The commitments made at COP21 in 2015 – to limit global warming to well below 2, preferably to 1.5 degrees Celsius – were monumental at the time, but increasingly stark reports from the likes of the Intergovernmental Panel on Climate Change on the unprecedented impacts of climate change have made it clear that the commitments seen in the Paris and Glasgow agreements will not go nearly far enough. Collectively, we need to do more, much more.

According to the Climate Reporting and Performance of the DOW 30, Euro STOXX 50 and FTSE 100 report published last year by EcoAct, an Atos company, it appears that many businesses agree, with two thirds of FTSE 100 companies now committed to net zero. However, only 36% of the FTSE 100 has set a Science-Based Target (SBT) for Scope 3 emissions reductions, which is particularly problematic given that for many organisations, this accounts for the largest part of their carbon footprint.

With the climate in crisis the need for businesses to tackle all direct and indirect emissions in line with a 1.5°C scenario is swiftly being reframed as business critical. So, it is even more worrying that target setting on Scope 3 emissions appears to be stalling, with only small year-on-year increases (from 32% in 2019) in the number of companies committing to tackling their supply chain.

A perfect storm

While it is hoped that the commitments seen at COP26 will act as a catalyst, much of the momentum for businesses to address Scope 3 emissions to date has been as a result of investor expectations. The publication of the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations back in 2017 was a real wake-up call for the industry.

By recommending that all financial filings include climate-related financial disclosures, climate change was put firmly in the investor spotlight, particularly in the context of risk and opportunity. Fast forward to today, the TCFD has been so impactful that investors were encouraging its endorsement as an outcome of COP26, while the UK government has already set out a roadmap to make TCFD-aligned disclosures mandatory across the economy by 2025.

With greater transparency and improved standardisation, the effects of climate change are becoming routinely considered as a part of business and investment decisions. For investors, this equates to looking much more closely at their most material Scope 3 emissions: their portfolio. Encouragingly, as of winter 2021, 220 asset managers with portfolios worth US$57.4 trillion have signed up to the Net Zero Asset Managers Initiative which strives for net-zero emissions by 2050 or sooner.

Consequently, investors need businesses to be more transparent – they want to see cold, hard carbon numbers to understand how intent is being turned into impact. For example, the CDP’s coveted A List status – which identifies global leaders on environmental transparency and action – now requires businesses to disclose all material Scope 3 emissions and have a robust plan in place to reduce them. As such, this year, only 277 companies made it onto the list.

Despite these positive advances, it’s clear that there are still many businesses where the risk of failing to address Scope 3 emissions has not ‘hit home’. If businesses don’t begin to meaningfully tackle value chain emissions, they risk being deselected by investors in the same way that the fossil fuel industry has seen trillions in divestment over the past decade. In the same timespan again, we could arrive at a future where all companies are assessed against their climate change performance.

A future like this may create unease for those businesses with high Scope 3 emissions. However, the focus should be not on where those businesses have come from, but where they are going. Continued investment will be determined by their ability to show a clear roadmap and notable achievements being made against emissions reduction targets.

Who’s in the driving seat?

It’s fair to expect that some of the impetus for change should be driven by more stringent legislation. Thanks to its presidency of COP26 all eyes are on the UK government to be saying and (more importantly) doing the right things to accelerate our journey to becoming a low carbon economy. This can’t stop now the summit is over.

We all celebrated the drop in emissions in early 2020 as a result of Covid-19, but it also put into context just what it takes to achieve the kind of year on year decrease we need to achieve our 2030 decarbonisation target. And the fact that emissions are vehemently bouncing back tells you everything you need to know about how that’s going. To drive the necessary reduction in supply chain emissions, the government needs to set ambitious legislation around reporting and carbon performance.

And if not legislation, then there is still an element of self-interest that should persuade businesses to act. After all, carbon is a cost – be it fuel, electricity, raw materials – so reducing carbon should be a no brainer. However, it’s often the complexity of getting started, and the need for a long-term approach, that puts businesses off investing the necessary resources to begin tackling their Scope 3 emissions. The key is leveraging data to know where to start.

From data to collaboration

As in many other aspects of business, you can only manage what you can measure. Collating and analysing good quality data from your supply chain is the quickest way to understanding where the most impact can be made in the shortest space of time. For that, most businesses will need a good supply chain management approach with data processes and systems that can collect information from suppliers. It’s likely that the data collected the first few times around won’t be perfect, however minor inaccuracies from estimating emissions far outweighs the cost of inaction.

Once collated, a business can use the data to identify which categories of their Scope 3 emissions are most material in terms of carbon contributions and start there. A business might have 5,000 suppliers, but through data, will often find they can shortlist a top 100 to engage with first to make a significant dent in Scope 3 emissions.

Engagement with suppliers is a multi-team task that needs to be led from the top. Carbon reduction has historically been seen as the remit of the sustainability team; however, supply chain engagement requires contributions from across the business. From procurement, through to research & innovation and development and sales, everybody has a role to play. To facilitate this, an element of upskilling may be required to ensure everyone has the right skills and expertise to manage those relationships as well as ensuring teams have the necessary software and processes. For example, the procurement team may need to introduce new measures within their supplier management programme to include environmental parameters as part of evaluation and performance metrics.

Once the basics are in place, the business can begin engaging its supply chain to agree targets that will support the transition to net zero. Many businesses will find this engagement to be a gradual and creative journey – oftentimes both businesses will be venturing into new territory, so it pays to be openminded and foster a culture of support and collaboration that allows both businesses to benefit.

Altogether, this might seem like quite a daunting task for those businesses with limited resources, several consultancies now specialise in providing this type of expertise – from measurement and target setting to engagement and reporting – helping businesses reduce their Scope 3 emissions to limit global warming to 1.5°C.

The journey to net zero

Businesses that are proactive on net zero will find themselves in a position of competitive advantage in the years to come. Those that don’t act, risk losing investor confidence and credibility more broadly. But as COP26 has underlined, businesses need not face this challenge alone – in fact collaboration will be key to success. Tackling Scope 3 emissions can be challenging for some businesses, particularly those with lots of suppliers, or limited resources. However, by using data to prioritise actions, and being deliberate in turning intent into impact, every business can make positive steps along their journey to net zero today.

 

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