Executive Summary
A growing number of companies are committing to science-based net-zero targets for their greenhouse gas (GHG) emissions. As of August 2021, 30 percent of the 1000+ largest companies listed on European stock exchanges have set a net-zero target covering scope 1, 2, and 3 emissions.
Scope 3 emissions represent the indirect emissions coming from the upstream and downstream parts of the value chain and account for more than 85 percent of the world’s overall carbon footprint. A low carbon economy cannot be achieved without addressing these emissions. As scope 3 emissions are not under the direct control of the reporting companies, it is challenging to measure and reduce them.
Stakeholder pressure and new legislation will drive companies to become more transparent and responsible, and increase their scope 3 emissions reporting. Furthermore, for companies that have not yet disclosed or not even started evaluating their scope 3 emissions, setting net-zero targets that include scope 3 emissions could pose a hidden risk for them and their investors. To evaluate their scope 3 emissions, companies need to build a solid base of data.
Insights for What's Ahead
- Stakeholder pressure and new legislation will drive companies to become more transparent and responsible, and increase their scope 3 emissions reporting. Reporting of scope 3 emissions, currently voluntary, is expected to become mandatory in the near future. In April 2022, the European Financial Reporting Advisory Group (EFRAG) and the US Securities and Exchange Commission (SEC) proposed rules where publicly traded companies would be required to disclose their scope 3 emissions. Under the proposed SEC rule private companies are exempted and the publicly traded companies will not be held liable if their estimates are wrong. However, it shows the current trend in nonfinancial disclosure legislation: it is becoming mandatory, and scope can only become broader. Other regions are expected to introduce similar legislation.
- The transition to a low carbon economy requires companies to review their entire value chain. They may also have to rethink their business model or alter their product design to achieve their targets. With increasing carbon prices, established supply chains will change significantly. To be well prepared, companies need to improve the transparency across their entire supply chain and their customers’ use of their products and services. Reducing scope 3 emissions by exerting influence upstream is not always feasible. In such cases companies can make efforts to reduce the quantity of the high-emissions material they buy. For example, companies may be able to expand their business models by adopting circular economy principles (e.g., refurbishing old products or use low-carbon principles in product design, such as lower weight or alternative low carbon material).
- Companies need to have a fully integrated GHG reduction strategy. Engagement with the value chain partners needs to be fully aligned with the overall company climate ambition. It is a demanding and complex task. With the right prioritization it can be achieved in a reasonable timeframe and can help create a more resilient supply chain. A robust master data management system for all processes involved is a prerequisite.
- Companies need to incorporate scope 3 emissions reduction into supplier management. Achieving net-zero targets will require companies to engage suppliers in joint efforts to achieve the required reduction. The appropriate approach will depend on the strength of the supplier relationship and the objective capability of a supplier to achieve relevant emission reductions.
- When starting their scope 3 management journey, companies should be clear about their business ambition and goals. Managing scope 3 emissions can help companies to identify and understand risks and opportunities associated with value chain emissions, identify GHG reduction opportunities, engage value chain partners in GHG management, and enhance corporate reputation through public reporting.
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