Scope 3 emissions can account for over 90 per cent of companies’ total emissions and are, on average, 26 times greater than the emissions from direct operations. Yet, corporates continue to overlook supply chain emissions, according to a new report from CDP and Boston Consulting Group (BCG).
Indeed, despite the window to reach critical international climate goals closing, the action gap between direct and indirect emissions remains. In fact, the research found that corporates are twice as likely to measure Scopes 1 and 2 emissions and 2.4 times more likely to set targets for them compared with Scope 3 supply chain emissions. Moreover, a whopping 90 per cent of companies are still without a target or transition plan on Scope 3.
Sonya Bhonsle, Director of Strategic Accounts at CDP, said the report’s figures highlight that the challenge of effectively measuring Scope 3 emissions is widespread and spans industries.
The Elephant in the Room
Accounting for the majority of company emissions, Scope 3 is undoubtedly the elephant in the room. Scope 3 emissions occur indirectly across the value chain, both upstream and downstream, from suppliers all the way down to consumers and their use and disposal of a company’s products.
In the fossil fuel industry, for example, Scope 3 emissions account for up to 95 per cent of emissions. Yet, last year, the World Benchmarking Alliance’s (WBA) Oil and Gas Benchmark found that just 18 per cent of the world’s top oil and gas companies had Scope 3 emission targets.
According to Amir Sokolowski, CDP’s Global Director, Climate, even those with targets, had not supported them with credible transition plans.
Beyond oil and gas, this year, the non-profit found that a mere 15 per cent of corporates reporting through CDP have set upstream Scope 3 targets.
Regionally, in the Middle East, countries and the corporations operating within them still have a way to go to catch up with the rest of the world on emissions transparency.
Time is Ticking on Scope 3 Emissions
This Scope 3 inaction comes as climate change intensifies and the world endures month after month of record-breaking temperatures, challenging the path to 1.5°C by 2030, the report warned.
Indeed, the Scope 3 report outlined that it takes corporates 12 to 18 months to deliver partial Scope 3 disclosures and one to three years for full Scope 3 disclosures. On top of that, it also takes three to five years to see meaningful reductions in Scope 3 upstream emissions.
Considering that so few have started this process, those beginning are at least two to three years away from setting Scope 3 targets and will likely only realise reductions by 2028, the report said.
Further, it noted that the pace of rollout for mandatory disclosures outside of Europe would likely further delay action for upstream emissions.
Against this backdrop, the report said the onus of action and accountability falls on corporates—both management and the board of directors—to drive internal change and investors to reinforce this through the capital market.
Climate-Responsible Boards Key to Steering Action in Right Direction
As such, the report emphasises the need for a climate-responsible board with oversight and at least one climate-competent board member.
The research found that corporates with a climate-responsible board were:
- 4.8 times more likely to have a Scope 3 target,
- 4.8 times more likely to have a 1.5°C-aligned transition plan with a Scope 3 target,
- 3.4 times more likely to have climate requirements in supplier contracts and
- 3.8 times more likely to collaborate and partner with suppliers (including developing low CO2 products).
Yet, at present, climate-responsible boards are severely lacking, found in just one in three corporates disclosing through CDP.
Moreover, nearly half (49 per cent) of board members say climate change is “not” or “only slightly” integrated into investment decisions, and just 29 per cent feel knowledgeable enough to monitor and challenge climate plans.
Further, 46 per cent of board members said their board has insufficient knowledge of the financial implications of climate change.
Here, the report underscored the importance of education, recommending that existing board members be upskilled and climate competence integrated into board selection criteria.
According to CDN, it is also advisable to enlist the help of independent board members or external advisors to establish a board climate committee.
Another recommendation is for corporates to actively provide oversight and steer climate risk assessment and mitigation — reflecting “climate-related liability” in board TORs.
Mandating reporting climate risk and monitoring transition plans was also underlined as key.
Engaging with Suppliers is Paramount, but Corporates are Lagging
The paper reported that corporates that engage with suppliers on climate are 6.6 times more likely to have a 1.5°C-aligned transition plan with an upstream Scope 3 target.
Indeed, the CDN outlined that supplier engagement is crucial for setting realistic targets and can enable more climate-friendly operations upstream, with corporates leveraging their purchasing power.
It said the first step here is creating transparency on supplier emissions data, which supports corporates in setting targets and enables them to institute contractual obligations for suppliers in line with their transition plan.
Yet, only 41 per cent engage with suppliers on climate issues, less than one in 10 collaborate closely with suppliers, and fewer than three in 100 corporates require suppliers to set science-based emissions reduction targets.
Internal Carbon Pricing & Pricing Climate Risk
Another key consideration is Internal Carbon Pricing (ICP), the report said and noted that:
- Corporates with an internal carbon price are 3.7 times more likely to have a Scope 3 Target and 1.5°C-aligned Scope 3 transition plan,
- Corporates with an internal carbon price that is mandated for all business decisions are 4.1 times more likely to have a 1.5°C-aligned Scope 3 transition plan,
- Corporates with an internal carbon price that is mandated for all business decisions are 3.5 times more likely to have climate requirements in supplier contracts.
Further, on pricing climate risk, the report found that while one in three corporates reporting upstream Scope 3 financial risks acknowledge risks to profit, only one in two evaluate the financial risks from upstream emissions.
However, the payoff for having a defined process for identifying, assessing, and responding to climate-related risks is significant. These corporates are four times more likely to foresee upstream climate-related risks that could have a substantive impact on business, it found.
The report detailed that a lack of climate risk consideration is also prevalent across the investment landscape, with just 34 per cent integrating it into their investment policy and less than one in ten requiring Scope 3 disclosure in these policies.
The impact? Insured losses from climate events have doubled, and the cost of reinsuring properties against extreme weather has grown over 70 per cent since 2016.
The report underlined that investors “must demand transparency” from investments on their Scope 3 for an accurate and fair assessment of risk-reward, especially in regions where there is an absence of regulations.
It also added that integrating climate in the Capital Asset Pricing Model (CAPM) can encourage corporate transparency.
Speaking on the report’s findings, Diana Dimitrova, BCG Managing Director and Partner, and Co-Author of the report, said: “The responsibilities and incentives to act on Scope 3 emissions for corporates and investors converge on risk management, and their oversight bodies must push for risk quantification and management.”
CDP’s Bhonsle added: “Meaningful strides toward emissions reductions require corporates to evaluate their full supply chain, then raise ambition and take accountability.
“The first step to driving meaningful change toward a 1.5°C-aligned net zero future begins with disclosure.”