- Companies are proving slow to recognise the business benefits of tackling Scope 3 emissions, shows CDP data…
- … but some are ahead of the curve, such as Danish power company Ørsted, which requires all suppliers to be using 100% renewable energy by 2025.
- Investor pressure on Scope 3 is an inportant driver for change for some companies, experts claim.
For many companies, the amount of greenhouse gas emissions that fall under Scope 3 – indirect ones stemming from a company’s value or supply chain – is mind-boggling.
They represent 90% of Anheuser-Busch InBev’s total greenhouse gas (GHG) emissions, said Aline Casagrande, the drinks group’s climate solutions global director, on a panel at the Capital Monitor Making Sense of Net Zero conference on 7 September. The company reported producing 26.5 million tonnes of carbon dioxide emissions last year.
Nestlé’s Scope 3 emissions, meanwhile, are three times those for the whole of Switzerland, said Robin Sundaram, sustainable sourcing manager for the Swiss food and drink giant, speaking on the same panel as Casagrande. After all, as he pointed out, agriculture – a huge factor in the company’s supply chain – accounts for 25% to 30% of emissions globally. Nestlé reported 113.7 million tonnes of CO2 last year versus Switzerland’s 33.4 million, by Statista figures.
On average, Scope 3 emissions account for 11.4 to 27 times a company’s operational emissions, said fellow panellist Sonya Bhonsle, global head of value chains and regional director of corporations at London-based non-profit CDP, which runs a global disclosure system for environmental emissions.
Scope 3 action: ‘Future-proofing’
Daunting though the task of tackling Scope 3 emissions may be, Bhonsle argued that it made sense to get started: “ESG is good for business. Companies that are taking action on transitioning their supply chain are future-proofing themselves.”
That is despite the bottom-line benefits of doing so. She said companies that disclose their emissions to CDP had reported saving at least $45bn by cutting down on all types of waste and using renewable energy.
But the message is taking time to get through. Only half of the companies in Germany’s benchmark Dax 40 stock index, for instance, have reported on more than four of the 16 categories of indirect greenhouse gas emissions, as identified by the GHG Protocol, and five have not disclosed on them at all, according to a report from Berlin-based credit rating agency Scope Group, published last month.
This head-in-the-sand approach appears to be a common one globally, CDP data indicates. Around 11,000 companies globally report their emissions to CDP. Only 20% report most of their supply chain emissions, while 75% disclose their operational emissions. Additionally, only 38% of companies that do disclose under Scope 3 have engaged with suppliers to take action on emissions.
In some sectors, there is often talk but little action. Big energy companies often claim to be addressing Scope 3 emissions while doing little or nothing to tackle them.
Denmark’s Ørsted is an exception. The country’s largest power company and the world’s largest developer of offshore wind power by volume of projects is 87% of the way to being carbon-neutral in energy generation and operations.
Ørsted said in February 2020 that it intended to be carbon-neutral by 2025, cut energy trading and supply chain emissions in half by 2032 (see chart below) and achieve net-zero emissions by 2040.
Ørsted’s requirements for suppliers
On 10 August, it upped the pressure on its suppliers by insisting that all of its suppliers use 100% renewable energy by 2025. “We saw a need to accelerate the uptake of electricity options,” Filip Engel, Ørsted’s vice president of sustainability, tells Capital Monitor.
Since 2020, the company has asked suppliers to disclose emissions and set science-based targets. “When we started the programme, very few disclosed emissions. Now it’s close to all of them,” says Engel, adding that a third now have science-based decarbonisation targets too.
Ørsted has focused on what it calls its “strategic suppliers” – the firms that cover 75% of the total supplier spend.
A key factor in the programme’s success is that when a company wants to provide services to Ørsted, regardless of its size, it is asked whether it uses green electricity and must pledge to do so.
This is not unheard of in other industries. Since 2017, for example, British telecoms firm BT has insisted that all supplier contracts worth more than £25m ($29.3m) have a net-zero target science-based target in place or commit to one within six months.
However, it appears to be a new approach in the energy sector.
As has been seen in other sectors, Ørsted is taking a softly-softly approach to assessing compliance with its criteria. The company has frequent conversations with its strategic suppliers rather than monitoring electricity usage.
“They are pretty much all big industrial companies… looking to transform their industrial operations,” Engel says. “Suppliers now know about the topic [of Scope 3 emissions] and have ways to cover it.”
Going beyond electricity usage
But to achieve net-zero emissions by 2040, Ørsted realises that it needs to go even further.
Electricity is an “important lever” for cutting emissions, says Engel, but the company is also focusing on other parts of the supply chain. In April, Ørsted agreed to develop service operation vessels for offshore wind farms that can operate on green fuels with Esbjerg-based offshore wind farm service provider Esvagt. That came after Ørsted signed an agreement with German steel giant Salzgitterin in late January to recycle scrap from decommissioned wind turbines into the steel production process.
Engel cites market demand. “Customers are increasingly asking for products with as low a carbon footprint as possible,” he says.
Similarly, AB InBev has been looking to manage the resource and energy efficiency of its indirect supply chain. Casagrande pointed to work the Belgian multinational has done with Anglo-Australian mining group Rio Tinto, which supplies one of AB InBev’s suppliers. The two firms piloted new aluminium smelting technology powered by renewable electricity.
As a result, she said, "we were able to bring to the consumer Michelob Ultra cans that are produced with 30% fewer carbon emissions".
An important driver of such moves is pressure from investors, who are asking some “really poignant” questions of their investee firms, Bhonsle tells Capital Monitor.
This trend is, in turn, being driven by regulation. From next year, for instance, in Europe fund managers will have to report on Scope 3 emissions in their portfolios, according to the Sustainable Finance Disclosure Regulation (SFDR).
Another reason for companies' – and their investors' – rising interest in monitoring Scope 3 emissions is fear of failure.
Bhonsle cites a car manufacturer failing to notice that its suppliers had not been actively managing their environmental impacts, without naming the company. One had its licences to operate revoked, which meant that it could no longer deliver. It was a “shock to the system”, she says, as the manufacturer had to try to find someone else to fill that gap.
“There’s a lot of cost associated with risk failure,” Bhonsle adds. “If your suppliers fail to deliver, are you ready for that?”
Such episodes underline that environmental risk poses commercial and thus financial risk – and that companies are increasingly acknowledging that a closer eye on supply chains may help unearth it.
Capital Monitor is hosting the second day of its Making Sense of Net Zero webinar series, alongside the New Statesman and Tech Monitor on September 21. Find more information on NSMG.live.