A holistic approach to sustainability and ESG

John Spear at epi Consulting argues that disregarding Scope 3 in climate reporting is a mistake 

The news that, under new regulations signed into law in March, publicly traded companies across the United States would be mandated to report on their climate action, was heralded in some quarters as a big success.

And why wouldn’t it be? With the planet getting hotter and the need to take bold, decisive action necessarily more urgent, binding big American companies to be transparent in this area seemed like just the kind of steps that should be taken.

But, as many media outlets and commentators noted, the regulations passed by policymakers were different from those proposed back in 2022. Ostensibly in an effort to lessen an unnecessary burden imposed on companies, the Securities and Exchange Commission cut Scope 3 greenhouse gas disclosure requirements.

Those requirements were far from unnecessary. Scope 3 is such a critical area of climate emissions reporting that excluding it is almost tantamount to making the requirements worthless.

The third-party, upstream and downstream value-chain emissions (Scope 3), which include (for instance) raw material extraction and production of purchased materials, as well as product use and disposal, can comprise upwards of 70 percent of a company’s overall total emissions. For some companies, the proportion can be well north of 90 percent.

The Scope 1 and Scope 2 emissions on which publicly traded U.S. companies will report – emissions that are under the direct control of those companies – can be absolutely tiny, meaning that the corporate environmental impact picture painted by certain companies will be misleading to the most extreme degree.

How companies miss out

Needless to say, some companies will have celebrated the news that Scope 3 was being dropped. Gone was the need to wrestle with the innate complexity of supply chains in a dynamic and globalised world. Gone was the need to find ways to cajole suppliers into becoming more sustainable.

Or so went the thinking. But avoiding confronting Scope 3 is just kicking the can down the road. Companies that fail to address it lose out in a number of ways.

First, and most obviously, they don’t develop an accurate understanding of their carbon footprint, which can both undermine investor confidence and lead to wishful thinking where sustainability is concerned. Both deliberate greenwashing and accidental misreporting has plagued corporate sustainability for years, illustrating the vital importance of getting a clear picture of your climate impact.

Companies that commit to reporting can identify opportunities for emissions reductions that are likely to be made mandatory sooner or later, and will highlight ways for companies to save money, especially in the area of financing costs, where green bonds are often issued at a discount to the general market, but come with a requirement to meet emissions targets. 

Second, with younger generations rising in purchasing power and deeply concerned about the rate of global warming, companies that track and report on Scope 3 find themselves at a competitive advantage. They can attract younger talent and appeal to a wider customer base.

They can also build the ‘skill’ of addressing Scope 3 emissions, developing more and more innovative ways to engage effectively with suppliers, improve energy efficiency, transition to more sustainable ways of working, and adapt their business model accordingly.

The business case

Therefore, though the corporate sustainability conversation tends to centre on the moral case for ‘going green’, the business case is just as relevant. Companies who ‘lean in’ stand to benefit from a better reputation, a broader talent pool, a larger customer base, more efficient processes, and lower financing costs.

They can also help to drive change across their industry, one upshot of which is that they’ll help to develop industry-wide standards to which they and their peers can then hold themselves accountable.

Furthermore, they can work with those peers to make their climate action easier and cheaper. Competitors often share suppliers, and so can share the responsibility of engaging with them, auditing them, training them and taking other actions designed to bring down Scope 3 emissions. This kind of concerted action, which involves putting market rivalries to one side and working together, is a crucial piece in the climate puzzle.

The right (and wrong) side of history

‘History will be kind to me, for I intend to write it,’ said Winston Churchill, casting light on the error of thinking there is always a ‘right’ or ‘wrong’ side of history. But as regards the climate crisis, we can be fairly confident of what future generations will think – and the gravity of the crisis is reflected in the increasing frequency with which policymakers worldwide propose tough new regulations.

The European Union has pushed ahead with regulations that mandate reporting on Scope 3 emissions. So has the state of California. The SEC has not only given rise to a potential mismatch in reporting standards but is perpetuating conditions in which U.S. companies, distracted by myriad other market pressures, find themselves on the wrong side of history, and woefully unprepared for the inevitable global move towards comprehensive Scope 3 reporting and action.

Disregarding Scope 3 is a mistake. It’s a real oversight by the SEC, and one that will undoubtedly lead to misleading climate reporting, individual rather than collective climate action, where individual action is taken by companies without the experience or skills needed to comply with future legislation. Those companies lose out on the chance to save money, boost efficiency, bolster their reputation, and, in short, increase their long-term profits.

Thoroughgoing, exact reporting on all three Scopes is essential to propelling the changes needed to bring down GHG emissions worldwide. Yes, there are challenges. But there are also opportunities.

John Spear is Managing Director of epi Consulting

Main image courtesy of iStockPhoto.com and Ross Tomei