Phillip Cornell, Global Head, Sustainability, Economist Impact and Sardar Karim, Policy & Insights, EMEA, Economist Impact
Scope 3, or value chain emissions, present a key hurdle to companies in their net zero transition. Unlike scope 1 and 2 emissions which derive from a company’s operations and energy use, scope 3 emissions derive from suppliers, consumers, or portfolios. They constitute a major proportion of global CO2e emissions, require coordination of stakeholders across the business value chain to monitor, and mitigating them calls for drastic changes in business models, product design, procurement choices, supplier and customer engagement, internal policies and investment strategies.
To help address these challenges, Economist Impact has released the Value Chain Navigator (VCN), a digital platform that offers companies a benchmarking tool to learn from peers and help charter their own net zero journey; a one-stop-shop for regular updates on evolving regulations related to scope 3 emissions; and case studies that offer real examples of corporate climate action.
The VCN research finds that the five sectors covered in the study – financial services, oil and gas, transport manufacturing, consumer goods, and technology and telecommunications – account for over half of the 36.8 gigatons of CO2e emitted globally in 2022. Scope 3 emissions constitute 93% of them. In some sectors, such as financial services, up to 99% of total emissions are scope 3. Yet only 53% of the 1,250 surveyed companies across all the sectors self-report to collect and monitor data on scope 3 emissions. The transport manufacturing sector leads with 66%, while the technology and telecommunications sector is lagging with 40% of companies reporting to collect data on these emissions.
There is mounting pressure on companies from stakeholders including customers, investors and regulators to take meaningful climate action. The Paris Agreement states that global scope 3 emissions must be reduced by 45% from 2010 levels by 2030 to limit disastrous global warming. The Securities and Exchange Commission is encouraging firms to track and report on their value-chain emissions, and a binding rule is expected in 2024. The International Sustainability Standards Board has recently confirmed that compliant financial institutions must publish emissions data, including scope 3, linked to their lending and investment practices.
Despite the significance of scope 3 emissions and stakeholder pressure to address them, companies report that only a quarter of emissions targets aim to reduce them. The reasons for such inaction include limited access to relevant data from suppliers, complex calculation methodologies, and a lack of internal expertise and resources for measuring scope 3 emissions.
Economist Impact’s research finds a number of initiatives that some companies have undertaken to effectively manage and mitigate these emissions. Some companies engage with customers to nudge their behaviour, raise awareness on sustainable attitudes and even involve them in direct consultations to define corporate sustainability strategy. However, supplier engagement is one of the least adopted strategies. Companies need to focus on developing sustainability KPIs and incentivising suppliers to meet them. Strategies to do so include rewards and penalties, developing an engagement strategy to establish formal communication channels with suppliers, offering technical and financial support, and regularly auditing supplier emissions. Smaller companies with under US$ 50m in annual revenue are particularly likely to fall behind on scope 3 mitigation unless bigger companies in their value chain provide financial and technical support. But many small companies are finding innovative ways to reduce emissions despite a lack of resources. Three-in-five small companies report adopting new digital tools, from cloud computing to emerging data platforms that translate supply chain data into quantified carbon footprints.
The research also found that high-impact, quick-return strategies and initiatives are particularly sector dependent. Business model innovation is, on average, believed to be an effective way to reduce emissions in a relatively short time period. Of the surveyed companies that are engaging in business-model innovation, 30% expect it to reduce their scope 3 emissions by more than 30%, and 34% expect to see that reduction before 2025. This perception is particularly prevalent among oil & gas and technology & telecommunications companies. Companies in the financial services sector identify investment strategies as having significant and quick impact, while transport manufacturing companies are looking at operational policies. Technology is a critical component for reducing scope 3 emissions, but companies are unsure which are most impactful and uptake is consequently slower than expected. The International Energy Agency estimates that 40% of the emissions reductions needed to reach net zero by 2050 will come from adoption of technologies that are still being developed. However, companies report high upfront costs and prolonged return periods as deterrents to invest in such technology.
VCN research shows that there is no one-size-fits-all approach to managing and mitigating corporate scope 3 emissions. A company’s characteristics – such as its size, location, sector and even sub-sector – significantly influence the impact and timeline of various emissions reduction strategies. Identifying the right ones matters, because failing to properly account for and reduce scope 3 emissions will prevent companies, countries, and the global community from reaching net-zero targets. The VCN can guide companies into a net-zero future and support worldwide decarbonization.