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August 11, 2022

Scope 3: Emerson Electric sets engineering sector pace

The US equipment maker has ambitious net zero targets, including a 25% cut in Scope 3 emissions by 2030. It is also reporting in more detail on these points than its rivals, despite strong pushback against US climate disclosure rules and more widely against ESG.

By Adrian Murdoch

Mike Train, chief sustainability officer of Emerson Electric, speaks to Capital Monitor about the company’s net zero strategy. (Photo courtesy of Emerson Electric)
  • Emerson Electric aims by 2030 to achieve net zero on its Scope 1 and 2 emissions and reduce its Scope 3 emissions by 25% from a 2021 base.
  • Emerson has appointed thousands of in-house ‘sustainability ambassadors’ and is speaking with its biggest suppliers globally about emissions data.
  • Emerson is pursuing its emissions-cutting plans despite pushback against climate disclosure regulation and ESG in general and pressure on its share price.

Engineering companies, especially American ones, are not typically on the front line of those pushing the sustainability agenda – but there are exceptions. In mid-June Emerson Electric Company, an equipment manufacturer based in St Louis, Missouri, announced plans to achieve net-zero emissions by 2045 and has also set itself ambitious targets to hit by the end of the decade.

By 2030, the company intends to have achieved net zero emissions under Scope 1 and 2 – those generated directly from the company’s activities and by the energy it uses, respectively – and to have cut its Scope 3 emissions – those connected with Emerson but outside its direct control – by 25% from a 2021 base. In its 2021 ESG report, the group has published where its Scope 3 emissions come from in some detail (see chart).

As a result, Emerson – founded in 1890 as a manufacturer of electric motors and fans and which reported revenues last year of $18.3bn and this week posted a 46.9% rise in third-quarter profits to $921m – is an industry standout.

Although it is standard practice now to disclose details of Scope 1 and 2 emissions, Capital Monitor research found that Scope 3 is barely mentioned by many of Emerson’s largest competitors in the engineering and equipment manufacturing sector. Fellow US engineering conglomerates Honeywell or General Electric allude to Scope 3 in their sustainability reports, but give no details. Emerson provides more granular detail even than its largest European rivals such as Schneider Electric, while only Germany’s Siemens gives similar detail.

Statement of sustainability purpose

Emerson is making a bold statement of purpose given that the US’s proposals on mandatory climate disclosure are facing strong corporate and political opposition amid a wider recent political backlash against ESG. That’s on top of the fact that its share price is down 14.2% over the past year, and a pledge to reduce emissions is hardly guaranteed to boost valuations.

Emerson is nonetheless continuing an established strategy. The company made its first public commitment to sustainability in 2018, when it announced plans to reduce its carbon intensity for Scope 1 and 2 emissions by 20% over 10 years.  

It took Emerson a couple of years of modelling emissions to “get the data stable”, Mike Train, who was appointed Emerson’s first chief sustainability officer in March 2021, tells Capital Monitor. The group has worked closely with Montreal-based engineering consulting firm WSP Consulting, as well as professional services firm PwC and London-based environmental impact measurement firm CDP.

Now, within three years Scope 1 and 2 emissions have fallen by 16.9% and the company has mapped out its plans for the end of the decade.

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Renewables boost

“We were fortunate that our bigger manufacturing sites happen to be in places where there is a marketplace for renewable energy,” says Train, referring to the grid availability of renewable power. He cites Ohio and Texas as examples, adding that renewable energy is now “pretty broadly available” in Europe. The company has 170 manufacturing locations around the world.

What has also helped is the company has not had to convince employees of the need to develop a more sustainable business, he says. “People are in favour of sustainability; they just want to know how [to do it] and then you have to let them have some control [about] how it is implemented.”

Train did this by visiting 25 or 30 of Emerson’s manufacturing locations around the world, appointing 2,000 to 3,000 of its 87,000 employees as ‘ambassadors’ for sustainability and initiating an internal education programme of blog posts, podcasts and webinars.

Emerson’s 2030 targets for Scope 1 and 2 have already been approved by the Science Based Targets initiative (SBTi) as aligned with the 1.5°C trajectory set out by the 2015 Paris Agreement. Train says the firm is now getting its first external verification on that data done by a consultancy. He declined to disclose the name of the company, but Emerson has committed to publishing the data once it is complete.

Scope 3: Collaborating with suppliers

Tracking and managing Scope 3 emissions is a more difficult task, especially given that Emerson has some 18,000 suppliers. “Just like our employees, I had to warm them up,” says Train.

Emerson started to have conversations last year with its largest 50 suppliers in a number of sectors like steel, plastics and electronics. A major challenge, Train says, is that most of its suppliers are not listed companies but typically small and privately held firms.

“Nobody has been against it [the requests for emissions data], but they don’t know the how,” is how Train, perhaps unsurprisingly, characterises the response from his suppliers. “We’re still learning and we’re going to learn together.”

But US corporates generally – and particularly smaller, less well-resourced firms – are not keen to shoulder a greater disclosure burden, even if it is being demanded by larger companies and investors.

Nonetheless, Emerson is working with suppliers to develop joint sustainability roadmaps and has made clear that it expects numbers from them in the next year so it can proceed with its Scope 3 plans.

While Train says he wants to give them “time to absorb this”, the stick is coming for those that do not get on board. “If suppliers come back [to us] and say that they are not interested, then we’re going to find a different supplier,” he adds, declining to comment on what he thought the implications of the climate reporting proposals might be.

Share price pressure

Emissions cutting is now set to be an established theme for the engineering sector. “Decarbonisation is likely to remain the biggest topic for ESG and impact investors,” said Credit Suisse in a report in December last year.

A challenge for Emerson and its rivals, however, is that their valuations have been under pressure. Shares in Emerson are down 14.2% over the past 12 months, while those of Siemens have fallen 20% and Schneider Electric is off by 9.7%. That is against a backdrop of broad market falls: the S&P 500 has fallen 4.1% over the past 12 months. That said, Emerson’s stock price since the announcement of its net-zero target in June has moved marginally higher.

Still, it is hard to draw a direct connection between an emphasis on sustainability and share price moves, at least in the short term. These companies have also been under significant pressure from the market environment created by Russia’s invasion of Ukraine, inflationary pressures and lingering Covid-19 and supply chain issues.

And even if companies are being rewarded by the market for making sustainability advances, “that level of applause isn’t going to continue ad infinitum”, says Eugene Klerk, global head of ESG research at Credit Suisse in London.

In any case, Emerson does not appear to be taking this path for praise or a short-term valuation boost. If more big businesses were willing to take similar action regardless of market or political sentiment, energy usage and greenhouse gas emissions might well fall a lot further and faster.

Capital Monitor is hosting a webinar series: ‘Making Sense of Net Zero’. Find more information at NSMG.live.

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