Every day it becomes a little harder to believe that the world will be able to contain global warming. The last grim warning has come from the index provider MSCI’s Net-Zero Tracker last week, which tracks the carbon emissions growth of more than 9,000 listed companies in 50 countries.
The tracker calculates that less than 10% of the world’s largest listed companies operate in a manner aligned with the goal of keeping the global temperature rise at 1.5 ° C. In fact, based on the information leaked by the companies, listed companies are poised to fuel a 3C increase, MSCI said.
It is therefore high time that regulators step up the pressure, making companies more responsible not only for their own direct emissions, but also for those created in the “value chain” of their products and services.
Defined by the Greenhouse Gas Protocol as scope 3 emissions, these range from the pollution created by the production of raw materials purchased by a company to the way customers use and dispose of their products. According to the Carbon Disclosure Project, CDP, these indirect emissions are on average 11.4 times higher than operating pollution.
Companies understandably fear being held responsible for emissions over which they have no apparent control, especially once the products leave the factory. Why should a shampoo manufacturer be held responsible for how long someone using their products stays in a shower, for example?
In addition, calculating total Scope 3 emissions is fraught with pitfalls, given the inconsistent data available in complex global supply chains.
But not everyone has time to wait for perfect data, according to Kirstie McIntyre, director of sustainability at Diageo. Earlier this year, the beverage group sought to recalculate Scope 3 emissions from 33,000 suppliers as a first step to reducing pollution in its value chain by 50% by 2030.
The exercise made it clear that these shows are “too important to ignore,” McIntyre said. Diageo has calculated that around 90% of its carbon footprint is in scope 3, and this is not unique.
The company is working to define the investments necessary to meet them. It has already earmarked £ 1 billion over the next decade to reduce direct emissions. Investment in the value chain could be higher.
It is also a misconception that companies have no control over Scope 3 emissions. Companies can threaten to forgo suppliers or impose contractual conditions. Or they can require suppliers to clean up their own supply chains. They can also influence the way customers use the products. For example, shampoo can be rinsed out faster, which helps consumers save water and energy, says CDP’s Dexter Galvin.
It can be difficult to measure consumer behavior. But tracking the improvement in the effectiveness of the products they use should be possible.
Lombard Odier, the wealth manager, says investors could use third-party data to estimate Scope 3 emissions for companies in their portfolio. If investors can do it why can’t companies? Yet companies are still far too reluctant to take up the challenge of the value chain. Only 37% of suppliers engaged in their own supply chains in 2020, according to CDP.
There is evidence that regulators are moving towards reporting requirements. EU considering new rules but much can still be voluntary. The United States Securities and Exchange Commission has indicated that it would tighten the requirements, but scope 3 could still be omitted.
Disclosure, however imperfect, is crucial for investors. Without Scope 3 information, they cannot assess the risks facing companies in their portfolio.
“It’s not really about giving me a number,” said Nick Stansbury, head of climate solutions at Legal and General Investment Management. “It’s about telling me where [emissions] come from and how much it will cost to reduce them, and if you do something about it now. It is about understanding what will be the future demand for your product, when the emissions associated with it will be understood and priced.
As the world comes together for the United Nations climate change summit in Glasgow next month, world leaders are expected to signal their support for stricter reporting requirements on indirect emissions. Once the baselines are established, reduction targets along the value chain can be set. And there will be pressure on companies that might otherwise fall outside the scope of the reporting requirements. Businesses shouldn’t be afraid of disclosure. What currently counts is not the volume of emissions, but the direction of travel.