ESG Scope 3 emissions – why they are important and what you need to do about them

In this opinion article, Dr Nick Murry FIEMA, explains the importance of gaining an understanding of Scope 3 emissions.

It’s well known the UK is legally committed to reaching net zero by 2050 but the fact that this requires substantial near-term reductions, as well as cuts in ESG Scope 3 emissions, is less widely appreciated. In fact, the UK’s 6th Carbon Budget requires a 78% reduction in emissions by 2035 (c.f. 1990 levels) and makes clear that business has a critical role to play in achieving this.

How is this being driven?

COP26 saw a series of new announcements, adding to existing requirements on carbon reporting under SECR. These include new FCA rules and forthcoming legislation on disclosing climate related risks, as well as legislation requiring firms to publish net zero transition plans from 2023. Regulation will inevitably get tighter and its effects are already cascading through supply chains, raising the stakes for companies in terms of their business priorities.

Whilst many companies are making steady progress on Scope 1 (direct emissions) and Scope 2 (purchased electricity, steam, heat and cooling) managing Scope 3 (upstream and downstream) emissions is a bigger challenge, as they are harder to track and influence.

Why not wait until regulations force the issue?

There are two key reasons for acting now. Firstly, getting to grips with Scope 3 takes time and application, so it makes sense to start early and be prepared - those leaving it until forced to disclose will have a lot of catching up to do. Secondly, if done correctly, there are substantial benefits to be had in terms of reducing risks and realising new opportunities. These range from reducing reputation and business continuity risk to evolving more resilient business models by collaborating with suppliers.

How should businesses go about it?

Maximise the reduction potential. Determine where your Scope 3 emissions lie and focus on the most significant. These will mostly be in Scope 3, Category 1 ‘purchased good and services’ category (i.e. your supply chain) or Category 11 ‘use of sold products’. Identifying these, and the extent to which you can influence their reduction, should form the basis for setting targets and strategy.

Engage with your suppliers. At a basic level, this involves communicating expectations and requesting suppliers to disclose their emissions via a platform like CDP, whereas for larger organisations it could be supplier surveys, workshops and contractual arrangements that incentivise decarbonisation.

Collaborate. Prioritise those suppliers that matter most. In some circumstances it may be possible to work closely with direct suppliers to who your business is important, which may result in mutually beneficial innovation and cost savings. Collaboration should also extend to contributing to sectoral initiatives that contribute to a more level playing field.

Embed into your business. In particular into your procurement processes, so that suppliers are incentivised and responsive, and carbon is part of competitive tendering, including risk sharing, or rewarding suppliers for good performance. This can also include using standards that guide your business and make clear what you expect from suppliers. And it will require a joined-up approach internally.

Addressing Scope 3 requires time and expertise but will be increasingly important. Many companies have (understandably) focused on Scope 1 and 2 emissions, and are only now appreciating the need to gear up for Scope 3 and the benefits this can bring to the business. It won’t all be plain sailing but if you would like more information on how to start the process please contact Nick Murry, Head of Sustainability and Climate Change at Asesoria Group, on 01985 844000 or nick.murry@asesoria-group.com and he would be happy to have a chat.