Scope 3 Greenhouse Gas (‘GHG’) Emissions
Companies are expected to understand their material Scope 3 carbon emissions. However, these are often difficult to quantify and assess due to their sheer scale.
Scope 3 emissions are both substantial (accounting for approximately 65-95% of total emissions for most companies) and indirect in nature – a consequence of a company’s activities outside its direct control.
Carbon emissions calculations are categorized into Scope 1, Scope 2, and Scope 3. It is a way of differentiating a company’s carbon footprint. Scope 1 are ‘direct’ sources of carbon emissions, Scope 2 are usually emissions associated with purchased energy and company uses (i.e. electricity use), and Scope 3 are ‘indirect’ emissions, that is, everything else in a company’s value chain.
While the task of reporting Scope 3 emissions presents a challenge, the need to consider these emissions is evident when considered on a national scale. Australia’s export of fossil fuels exceeds its total domestic emissions by more than two-fold, positioning the country as the third largest exporter of fossil fuels in terms of CO2 globally (behind only Russia and Saudi Arabia).
Failure to disclose these emissions could mean that a significant portion of actual emissions are going unreported, thereby concealing the true scale of emissions impacts by Australian companies in relation to global warming.
In the Law:
Until recently, Scope 3 emissions reporting has been largely voluntary; however, there has been growing demand to make it mandatory. In light of recently published guidelines, such as the ISSB Standards, companies are facing increasing requirements to provide qualitative explanations of how reported emissions are calculated.
Under the ISSB guidelines, reporting entities will be required to disclose material Scope 3 emissions from their second reporting year onwards. These disclosures may encompass any one-year period ending within 12-months prior to the current reporting period.
As we have previously reported, Australian standards are likely to be in close alignment with the ISSB standards, making Scope 3 emissions reporting mandatory in the near future.
In the Company Boardroom:
For companies in the early stages of evaluating their Scope 3 emissions, it can be difficult to know where to start. By definition, Scope 3 emissions encompass all emissions that occur within the value chain of a reporting company, including both upstream and downstream emissions. They stem from sources that are owned or controlled by other entities, such as materials suppliers, third-party logistics providers, waste management suppliers, travel suppliers, retailers, employees, and customers… The list continues.
Developing a comprehensive corporate greenhouse gas (‘GHG’) emissions inventory – i.e. encompassing Scope 1, 2, and 3 emissions – strengthens a company’s understanding of its full emissions impact across its operations and value chain. This approach aids in focusing and directing efforts towards areas that generate the greatest impact. An important step towards effective management of emissions-related risks and opportunities, and GHG emissions reduction.
In the Investment Houses:
As of December 2022, it was estimated that approximately 31% of companies listed on the ASX 200 fully disclosed their Scope 3 emissions data, and 21% reported on some, but not all, of their Scope 3 emissions. This significant information gap indicates that many climate-related risks that companies and investors experience are likely being overlooked and not factored into investment business cases – ultimately leaving investor capital at risk.
Third-party ESG data providers can provide estimations for Scope 3 emissions; however, these are estimations only and cannot be relied upon. Investment houses with an ESG focus can formally engage with their investee companies to encourage the compilation of carbon emissions reporting. This is usually the first step for a company in understanding whether climate change may present risks or opportunities to future operations.
Our View:
When it comes to addressing climate change, it is evident that we cannot overlook the significance of Scope 3 emissions. Typically, these emissions represent the largest portion of a company’s emissions profile and have the potential to cross borders and industries.
We have seen large companies expecting comprehensive carbon emissions information from their Scope 3 suppliers, even instances such as banks seeking data from their teabag suppliers to fulfil their carbon disclosure requirements (an exaggerated example for illustrative purposes!) This is a heavy burden placed upon small companies, often leading them to seek expert advice and/or guidance – a scenario in which we at Anabranch are often approached.
The writing is on the wall; Scope 3 emissions must not only be counted but also dramatically reduced. How far away are we from all ASX 200 companies adopting Scope 3 emissions targets for their material sources? We are hoping very soon… But sadly, the data suggests otherwise.
For additional information on this important topic or ESG assistance, contact us today at info@anabranchesg.com.au
