Over the past year, there has been a notable surge in interest regarding Scope 3 reporting by companies in North America. This heightened attention can be attributed to various factors. One significant one is the emergence of legislation, such as the pending SEC regulation, which is expected to enforce stricter guidelines for environmental reporting and sustainability practices. Additionally, this past week the global baseline standard for climate-related disclosure by the As companies strive to align themselves with these impending regulations, and growing expectations, they are increasingly recognizing the understanding and addressing Scope 3 emissions is critical in their net-zero strategies.
Scope 3 emissions encompass a broad range of indirect greenhouse gas emissions that arise from a company’s value chain and according to the CDP, these emissions can account for as much as 75% of total corporate emissions. These emissions originate from activities that are both upstream and downstream, involving suppliers, customers, and other activities. Unlike Scope 1 and Scope 2 emissions where companies have more direct influence in assessing and reducing emissions, Scope 3 emissions present a unique challenge as they often require collaboration and data sharing with various entities or stakeholders in the value chain.
As businesses recognize the significance of Scope 3 emissions in their overall carbon footprint, noteworthy trends are emerging in Scope 3 commitments and accounting. These trends reflect the evolving strategies and practices that organizations are adopting to address and mitigate the impact of Scope 3 emissions. Here we delve into some of the key trends shaping the Scope 3 landscape:
Increasing Adoption of Scope 3 Targets
According to the most recent updates from the CDP’s Corporate Environmental Action Tracker, the proportion of global emissions covered by companies with a target including Scope 3 has more than doubled since 2019. This indicates a growing trend in corporations recognizing the importance of addressing their indirect emissions and taking steps to reduce their overall environmental impact.
Companies are seeking more granular and specific Scope 3 data to effectively monitor their progress. However, a significant challenge in setting robust Scope 3 targets lies in accessing high quality data to set a baseline of emissions that both accurately reflects actual business activities within a company’s supply chain while being actionable.
To address this obstacle, there is an uptick in solutions being developed focusing on creating Scope 3 data systems, facilitating the sharing of data across the value chain. One example of this is The Partnership for Carbon Transparency (PACT), which recently released updated technical specifications to help organizations exchange Product Carbon Footprint to identify and monitor the carbon footprint of chemical products.
When contextualized, this type of data becomes essential information for companies, empowering them to significantly reduce their greenhouse gas (GHG) emissions and achieve net-zero objectives. Additionally, it enhances transparency, auditability and traceability for GHG reporting.
Increased Scrutiny from government and stakeholders
In recent times, there has been a significant rise in scrutiny from both government bodies and key stakeholders, requiring companies to level up their climate commitments and report on their scope 3 emissions. The rise in North America can partly be attributed to the possible inclusion of Scope 3 emissions in the proposed SEC Climate Ruling. Under the potential ruling, companies would be required to disclose Scope 3 GHG emissions from upstream and downstream activities in its value chain and calculation methodologies if they are material to their operations or if a public Scope 3 emissions target has been set. Calculating Scope 3 emissions poses unique challenges due to their occurrence beyond the direct control of reporting companies. Although the uncertainty surrounding the ruling have led to delays expected through the fall of 2023, many companies are not shying away from the challenges. Instead, they are delving deeper into the intricacies of data collection and analysis to enhance their Scope 3 reporting accuracy and transparency.
A notable trend emerging in Scope 3 commitments and accounting revolves around the demand for comprehensive inventory management plans (IMPs). Companies no longer seek mere assessments; they crave meticulous mapping and robust plans to ensure traceability and auditability of their data. An effective inventory management plan serves as a safeguard, ensuring that a company’s carbon footprint remains relevant, complete, consistent, transparent, and accurate. With guidance like the EPA’s Inventory Management Plan Guidance for the U.S., companies can now , tailoring them to their specific needs and objectives.
Companies Responding to Increased Scrutiny by setting value chain-wide targets
In response to the increased scrutiny from stakeholders and regulatory bodies, companies are taking proactive measures to enhance transparency and due diligence by establishing value chain-wide targets and adopting science-based accounting practices.
According to the EPA, Organizations’ supply chains often account for more than 90 percent of their greenhouse gas (GHG) emissions. Many major international corporates are using Scope 3 reporting as a means of engaging with their supply chain, asking them to provide sustainability information including carbon emissions and reductions as well as energy, water and waste efficiency.
Voluntary reporting structures have become a favored avenue for these organizations to demonstrate their commitment to reducing the wider emissions in Scope 3. One effective approach they have adopted is pursuing the approval of science-based targets (SBTs) by the Science Based Targets initiative (SBTi), which requires reporting on relevant Scope 3 emissions. Going forward, we anticipate an upswing in companies aligning their Scope 3 targets with existing initiatives such as SBTi, positioning themselves well for future regulatory demands.
Not a passing trend
It is evident that Scope 3 reporting is not a passing trend; rather, it is gaining momentum and recognition for the pivotal role it plays in avoiding the worst effects of climate change. Companies find themselves under mounting pressure not only from impending legislation but also from investors and key stakeholders, all of whom expect robust net-zero targets accompanied by well-defined Scope 3 commitments.
As momentum increases on Scope 3 reporting, and more companies continue to report, we expect Scope 3 data to become more accurate and more actionable in terms of emission reductions. While the road ahead may be challenging, we remain cautiously optimistic about companies’ ability to achieve carbon reduction targets at the rate required by scientific consensus to limit global warming to 1.5 degrees.
By staying at the forefront of Scope 3 commitments and accounting trends, companies in North America can position themselves as leaders in sustainability, driving positive change and making a tangible impact on our planet’s future.