Sustainability
SUSTAINABLE SUPPLY CHAINS
TO THE CORE D
eadly wildfires on the islands of Rhodes and Maui, hail storms that sent ice flowing through the
greenwashing if disclosing Scope 3 emissions produces unfavourable new insights on their total environmental impact compared to their smaller direct carbon footprint. Indeed, my research with my colleagues Stephen Brammer and Jens Roehrich suggests that when companies begin the process of measuring their Scope 3 emissions, their data increases year-on-year, even when controlling for the growth of the firm. The risk of a subsequent backlash from activists and investors creates a strong deterrent for other companies to follow suit. Yet there are good reasons for why we should expect Scope 3 emissions to follow this initial trend. As companies begin measuring their indirect emissions on an annual basis, the efforts they invest in providing a more accurate picture is likely to reveal exactly that – a larger figure summarising GHG emissions from all elements covered under a wider-ranging scope. While many companies initially rely on their own estimates or widely available conversion tables to provide Scope 3 emissions data, over time they are likely to move towards more accurate figures based on data directly obtained from their suppliers and customers. To achieve this, companies employ a variety of formal and informal processes of collecting such data from their different supply chain partners. This includes, for example, companies requesting emissions data during tender stages and later demanding annual updates, enforcing this through their supply contracts. As these vendors and buyers begin to up their game in terms of more accurately accounting for their own Scope 1 and 2 emissions, the overall effect is that the emissions reported under Scope 3
Chain smoking
1. There are growing calls for firms to report Scope 3 emissions from across their value chains. This is time- consuming, challenging, and carries reputational risk. 2. When companies begin measuring Scope 3 emissions, the footprint they report increases year-on-year as they obtain better data from suppliers and customers. 3. If investors and analysts take that out of context, it can damage a firm’s reputation and performance.
streets in Italy, and a heatwave in the United States that may have killed as many as 300 people in the city of Phoenix as temperatures topped 43C for 31 consecutive days. The extreme weather patterns that have ravaged the Western world this summer are a stark reminder of the urgent need to respond to global climate change. Companies have long faced pressure to play their part by measuring and disclosing their corporate carbon footprint to investors and the wider public. These have typically been divided into Scope 1 emissions – Greenhouse Gases (GHG) a company creates itself, for example, from its industrial combustion processes or by using fossil-fuel-powered vehicles – and Scope 2 emissions, which are produced on a company's behalf when it buys energy to electrify, heat or cool its buildings. Now there are growing calls for firms to do the same for GHG emissions occurring up and downstream in their value chains. The number of firms currently disclosing these Scope 3 emissions is comparatively low. After all, the process is entirely voluntary. It is also fraught with ambiguity and complexity. Accurately reporting the emissions data for 15 different business activities across the lifecycle of a product, as well as for employee travel and commuting, is a time- consuming and challenging task. On top of this, many companies fear the arduous process could backfire and lead to claims of
4. After about five years,
companies begin to show improvements on Scope 3 emissions. Activist investors should recognise this trend to avoid punishing the wrong firms.
“The extreme weather patterns that have ravaged the Western world this summer are a stark reminder of the urgent need to respond to global climate change”
How Scope 3 emissions could harm your firm’s health
by Frederik Dahlmann
wbs.ac.uk | Warwick Business School
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