Why Scope 3 Matters
Greenhouse gas emissions are categorised into three groups or 'Scopes' by the most widely-used international accounting tool, the Greenhouse Gas (GHG) Protocol. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain.
https://www.carbontrust.com/resources/briefing-what-are-scope-3-emissions
I was interviewed yesterday on the raising of bar in reporting standards, SFDR, taxonomy and regulation. During the chat, I realized that Scope 3 really deserves to be explained better. Because it really matters. Not because it is the next, more ambitious level of calculation and data collection. Not even because it is technically challenging, with inevitable double counting which follows, taking into account, by the very definition, all other indirect emissions that occur in a company's value chain. It expands the reporting perimeter beyond the reporting corporate entity. All of these reasons matter also, but let me try and nail this from a new perspective.
Scope 3 matters because it makes businesses think their operations and impact including all stakeholders. If a company already reports Scope 3, this may be a valuable signal to an investor of the presence of sustainability in the strategy in a meaningful way. If a company has set a goal, based on Scope 3, to reduce emissions, maybe even in a science based framework, the signal strength increases. It increases because there must be an action plan to reduce emissions in the supply chain, with a code of conduct perhaps. If the end use emissions are significant, and in many cases they really are, Scope 3 level goal setting must mean product innovations to impact end use emissions.
And here's why I use this signal: if you execute on the above, you may achieve sustainable competitive advantage by managing your entire supply chain and stakeholder relationships. It's hard, extremely hard if your goal is ambitious. But it can make your business almost impossible to imitate. No wonder, some of the world's leading companies have chosen to go Scope 3. They want to show their clients climate means business and that they are cutting no corners. The level of transparency required, when you report on your progress on Scope 3, means sincere vulnerability. There is no greenwash you can apply, it is the point of no return. And that's precisely what future generations of stakeholders require.
Even if you won't achieve discernible competitive advantage to win it all with this, you are sending a strong signal to us all: you are probably running a great quality company. And that matters to a capital allocator. It's how I define sustainability in the investing context.
The second reason Scope 3 matters is less discussed. There is a problem with multinational agreements on climate. We have all heard it: the problem with harsh developed world emission goals is that it inherently always leaves the door open for someone to free ride and not only avoid challenges, but even to strategically benefit from the actions taken elsewhere. That's the thinking, the game theory, still prevalent. We still think, deep down, the climate problem, which really did begin to manifest with soaring green house gas levels from mid 2000's in certain emerging markets, is an emerging markets problem. We don't realize that this is not true. The push to globalization, to drive down cost and prices and wages, resulted in massive outsourcing and the very complex global supply chain framework we now have to deal with. We all were behind this drive. Which is why the leading global corporates are going Scope 3. Scope 3 is beyond politics, and beyond agreements. It transcends above the difficult domain because when you go Scope 3, you think your business in a genuinely global context. As a global corporate citizen. In the only way appropriate to deal with a global crisis. This means assuming serious responsibility, accountability and leadership we have never seen before.
We want these leaders to succeed. That's why Scope 3 matters. Share and discuss.