ESG360°
What is Scope 3 and why is it important?
As the polycrises of nature, climate and social justice unfold, the notion of ‘business as usual’ is being disrupted. Whilst Scope 1 and 2 emissions are largely under the control of an organisation, Scope 3 are considered the ‘hidden’ emissions, intricately woven into a company’s supply chain. Amounting to approximately 80% of an organisation’s total emissions, the enigmatic Scope 3 emissions are a major piece of the emissions puzzle (Edie, 2020). To facilitate data collection and management, these indirect emissions are broken into 15 categories, such as emissions arising from waste, transportation and distribution and the use of sold products.
As the tangible impacts of climate change become more prevalent, businesses are increasingly recognising the need to manage and curtail Scope 3 emissions. This has been exacerbated by new legislation emerging on a national and international level, and the recommendations of the Intergovernmental Panel on Climate Change (IPCC), that businesses must cut GHG emissions 45% by 2030 and meet net-zero by 2050 (as enshrined in UK law in 2019). Frameworks such as the International Sustainability Standards Board (ISSB) and the Corporate Sustainability Reporting Directive (CSRD) call on businesses to disclose climate and sustainability risks and opportunities in unprecedented detail. The ever-evolving ESG regulatory landscape consolidates the need to consider Scope 3 in emissions inventories now, despite the inherent complexities.
Where to begin?
The challenges posed by Scope 3 emissions are multifaceted, demanding a holistic approach, in which supplier collaboration is key. Three essential steps to manage the challenge presented by Scope 3 include:
- Establish robust governance structures by forming a net-zero working group within your organisation. This ensures that emissions data collection and reporting processes are streamlined and reliable, paving the way to self-sufficiency. It also means that accountability is shared and the key stakeholders from across the business can collaborate for improved outcomes.
- Upskill your team to ensure a strong understanding of the interplay between the E, S and G of ESG. These issues are complex and historically haven’t been part of many roles’ day to day, so bringing employees along on the journey is critical for engagement and success.
- Seek guidance from professionals with expertise in GHG emissions and climate science to ensure that best practise is adopted. Leveraging technological solutions is a vehicle to facilitate your net zero journey. At ESG360°, we empower our clients to make strategic ESG decisions and ultimately enhance enterprise value, as we provide critical guidance and tools for all stages of the net zero journey (such as mapping and engaging the supply chain and building a tailored decarbonisation strategy).
Case study: Engaging tier 1, 2 and 3 suppliers to collect the real data
The widespread reliance on Scope 3 emissions estimations is becoming the norm yet can massively distort a company’s ESG portfolio by relying heavily on averages and ‘guesstimates’. One approach to combat this, as ESG360° are currently piloting with a client, lies in collecting energy consumption data directly from your tier 1, 2 and 3 suppliers (as opposed to emissions data). Not only does this build greater governance structures and promote supplier collaboration, but it ensures more reliable data is collected as suppliers can provide accurate energy consumption data as opposed to estimated emissions totals. The energy data can then be used to calculate emissions resulting in a robust process, less prone to error and better able to stand up to audit.
To further enhance this process, categorising your suppliers based on type (e.g. do they supply a specific product or have a location dedicated to producing your goods) provides even greater granularity of data and will result in improved accuracy. Since there is no one-size-fits-all approach, engaging suppliers to collect the real energy consumption data can alleviate the burdens associated with carbon calculations and consequently render the process more accessible, paving the way for more action and less talk.
Image: ESG360‘s value chain map, highlighting the key emissions data required from each tier of the value chain.
A final note: Going beyond the E of ESG While the spotlight on carbon emissions data collection and decarbonisation is a huge milestone, the intricacies of ESG extend far beyond GHG emissions. Significant risks such as human rights violations and biodiversity loss in the supply chain warrants equal attention and ambition to manage and should be integral to a business’s ESG strategy. Simply put, by addressing E, S and G issues in silos and without adopting a systems-view, businesses will fail to implement the changes necessary to ensure they can remain resilient in the face of future uncertainties. To remain competitive and thrive in this new business reality, Scope 3 should be a key focus, in tandem with other social and governance risks and opportunities that ultimately impact enterprise value.
