Opinion: Disregarding Scope 3 In Climate Reporting Is A Mistake

Opinion: Disregarding Scope 3 In Climate Reporting Is A Mistake - Carbon Herald

by John Spear, Managing Director of epi Consulting

The U.S. Securities and Exchange Commission (SEC) has recently made headlines with its new climate reporting rule, a landmark move aimed at increasing transparency and accountability in regard to corporate climate impact.

But this new rule is conspicuous for its exclusion of Scope 3 emissions, which often make up more than half of a company’s total greenhouse gas emissions, and sometimes more. Many factors go into a decision like the SEC’s; but this new ruling is an oversight, and one that could hurt meaningful progress in the global fight against climate change.

Relevant: SBTi Issues Official Clarification To Its Scope 3 Statement

Scope 3 emissions are those that encompass all the indirect emissions from a company’s value chain, including both upstream and downstream activities. This ranges from the production of purchased goods and services to the end use of the products that are eventually sold.

For many companies, and in particular those in manufacturing and the consumer goods sectors, Scope 3 emissions comprise by far the largest percentage of their carbon footprint. And this is why the importance of including Scope 3 emissions in climate reporting can’t be overstated.

By ignoring this emissions category, companies complying with the SEC’s rule effectively present an incomplete and highly misleading picture of their climate impact. Precise, comprehensive climate reporting is essential for investors, consumers, and policymakers who depend on accurate data to make the right decisions.

Why not Scopes 1 and 2?

The argument for robust, multifaceted reporting on Scope 3 emissions is well-hashed but worth repeating whenever it’s suggested that Scopes 1 or 2 are in any way equivalent, as might seem to be the case to a casual onlooker.

The volume of Scope 3 emissions in fact frequently eclipses those of Scope 1 and 2 combined. And it isn’t hard to understand why. Scope 1 includes direct emissions from owned or controlled sources (emissions from vehicles, for example) and Scope 2 covers indirect emissions from the generation of things like purchased electricity, heating and cooling.

In contrast, Scope 3 includes all other indirect emissions that originate across a company’s value chain. Ignoring such a massive proportion of a company’s carbon footprint undermines the integrity of any climate reporting and dramatically weakens efforts to combat climate change effectively worldwide.

Against the grain

The good news here is that the SEC is very much going against the grain. Though there has been talk of an ‘ESG backlash’, this has been overstated. Globally, there is an inexorable trend toward more thoroughgoing climate reporting practices and legislation.

Both the European Union and the state of California, for example, are moving swiftly towards mandating the inclusion of Scope 3 emissions in climate reporting; in fact, this is stipulated in the EU’s recently passed Corporate Sustainability Due Diligence Directive (CSDDD).

Nevertheless, having a patchwork of global standards is unhelpful. It complicates the regulatory landscape for multinational corporations and investors, creating confusion, increasing inefficiency, and raising the cost of compliance. More importantly, it could slow the progress towards global standardisation and transparency in climate reporting of all kinds, which is essential for addressing climate change.

Relevant: SEC Mandates Public Company Disclosure Of Carbon Emissions But Cuts Scope 3 Requirement

The SEC’s new rule also seems out of step with the broader corporate and societal shifts toward greater sustainability and accountability. Many companies choose to report their Scope 3 emissions, since they recognise the importance both of being ahead of the pack in respect of sustainability and being seen to be ahead of the pack.

These companies often become more efficient, save money and get a boost to their reputation – with knock-on effects for brand image, hiring and retention, customer loyalty and sales. A good example here is the telecoms sector, where the number of companies committed to science-based targets and/or net-zero goals dwarfs that of most of the 2,000 largest companies in terms of earnings worldwide, and who have chosen to put their commercial rivalries to one side for the sake of the planet, and joined forces to address Scope 3.

Since they face similar challenges across the industry and often share common suppliers, they can work together to conduct sustainability audits, run training, share best practices and host webinars, with the result that the telecoms industry has become a leading sector globally in the fight against climate change.

The business case

That brings us to the business case. And from a business perspective, reporting on Scope 3 emissions offers numerous advantages. It enables companies to identify and then address the most consequential areas of their carbon footprint.

With a clear idea of their Scope 3 emissions, companies can begin to work with suppliers to streamline resource use, improve energy efficiency, and transition, together, to greener alternatives. Of course this has a positive climate impact.

But it can also drive innovation, bring down costs, reduce operational risk, and strengthen relationships across the supply chain – all of which benefit the bottom line.

Comprehensive reporting is sorely needed

Neglecting to include Scope 3 in its new climate reporting rule is an error on the part of the SEC. It inevitably leads to skewed representations of companies’ true environmental impact, bringing confusion where clarity is needed.

But it also eliminates an excellent opportunity for companies to push for environmental and economic improvements across entire global supply chains. Action follows information, and when the information is incomplete or misleading – as any corporate climate information that omits Scope 3 emissions will be – then any climate action is a long way from optimal.

It’s essential that as we navigate the stormy waters of the green transition, we have a map on which we can depend. Including Scope 3 emissions in climate disclosures is not just beneficial. It’s essential for creating a sustainable future.

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