The U.S. Securities and Exchange Commission excluded Scope 3 reporting from its new climate disclosure rules this time around, but the reality is that every company nevertheless needs to manage its transition to the low-carbon economy.
Investors, partners and customers increasingly want to understand which companies will succeed and which will fail in managing risks posed by climate change. Organizations cannot mitigate these risks without understanding their Scope 3 emissions (those generated by supply chain partners over which they have no direct control), which account for an average of 75% of an organization’s greenhouse gases. A company’s successful transition to the low-carbon economy depends on its ability to manage emissions stemming from all parts of its supply chain — suppliers, customers, portfolio companies, franchises and other third parties.
Many companies already face Scope 3 reporting requirements under the EU’s Corporate Sustainability Reporting Directive (CSRD). While the SEC’s new rules do not extend regulatory oversight on Scope 3 reporting, they will eventually move in that direction. Neither regulation will touch every company in the world, but they’re sure to influence every corner of the economy because of the interconnected nature of global supply chains. For large businesses to comply with CSRD, they’ll need as much direct emissions data as possible from organizations across every tier of the supply chain. The requirement will lead to global adoption of emissions reporting and management for companies of all sizes and sectors. As a result, the ripple effects of Scope 3 regulation have the potential to meaningfully reduce global emissions.
Beyond obligatory reporting, Scope 3 emissions data helps companies build their own roadmap to a sustainable future. According to the Task Force on Climate-Related Financial Disclosures, the vast majority (86%) of respondents believe cross-industry metrics create the potential for better financial decision-making.
Regardless of government regulations, Scope 3 emissions data is a business necessity. Laws will simply contribute to its rapid adoption.
A company’s own operational emissions (Scopes 1 and 2) play a relatively small part in its total carbon footprint. While Scope 3 emissions are generated outside an organization’s direct control, leaders need this data to fully understand their companies’ environmental impact and risk, and develop a meaningful decarbonization plan.
Scope 3 includes 15 categories, from raw materials and assembly to product use and disposal. Quantifying a company’s carbon footprint typically involves primary data (directly from the organization and its suppliers) and modeled data (derived from industry averages). The more direct information available, the more concrete the strategy.
Digging into Scope 3 insights can identify a company’s most significant risks to operating in a low-carbon economy. Examples include product-essential components manufactured with chemical-intensive processes or products running on gasoline. Once a company pinpoints its emissions hotspots, it can prioritize its mitigation efforts based on relative carbon impact and available mitigation methods.
Possible Scope 3 reduction strategies include:
- Vertical integration,
- Supplier engagement programs,
- Supply chain efficiency optimization,
- Business model adjustments, and
- Product design upgrades
Though current regulations do not include any forced emission reduction, the annual disclosure cycle and market pressures will hold companies accountable for showing progress. Data without action is meaningless — investors and partners need to see results.
Scope 3 reporting requirements zero in on the brand-supplier relationship, inextricably tying their risk together. A company cannot fully decarbonize until its vendors do, and high-risk supply chains will deter investors and potential customers or partners.
Gathering and sharing emissions data and targets help suppliers be part of the climate solution for their corporate customers. In addition to simplifying their customers’ Scope 3 reporting, this information demonstrates a supplier’s long-term viability by proving a dedication to carbon-reduction efforts. A decline in a supplier’s emissions reduces its customers’ Scope 3 emissions, pushing the customer toward its climate goals. As corporate customer expectations escalate, tangible progress on sustainability will be a competitive differentiator for suppliers in the years to come.
The mutual benefits of carbon reduction encourage collaboration among suppliers and brands. A supplier engagement program allows companies to help their partners develop and implement mitigation strategies through initiatives like education, technical support, incentives or assistance in renewable energy procurement. Supply chain partners may also work together to develop more environmentally friendly processes that impact the wider industry.
In the end, the specific requirements excluded from the final SEC rules won’t change business needs. The Scope 3 ball is already rolling. Investors and customers need to see an organization’s carbon-reduction plans and programs across their entire business model. If companies want to grow in the coming low-carbon economy, they must start gathering and reporting on their emissions data now.
Emissions reduction isn’t only a business imperative — it’s an environmental necessity. Scope 3 reporting motivates the business world to generate impactful change.
Tim Weiss is co-founder and chief executive officer of Optera.