A significant portion of the greenhouse gas (GHG) emissions produced by major companies still haven’t been measured.
We have a pretty good idea of how much carbon large companies emit when they make products because most of them are reporting those emissions regularly. But what about the emissions that are not as easily linked to a company’s activities? Think of, transportation in vehicles not owned by the company, outsourced activities, waste disposal and even the use of the product by the consumer.
These kinds of emissions are difficult for companies to measure, so they generally don’t report them. But they are critical to our understanding of climate change, which is currently suffering from a worrisome knowledge gap.
The GHG Protocol, the world’s most widely used GHG accounting tool, designed its scope 3 reporting standard to capture these emissions and hold large companies accountable for the carbon their products emit from cradle to grave.
Scope 1 and Scope 2 emissions are relatively straightforward and well defined. They consist of direct emissions from production and indirect emissions from the consumption of purchased electricity, heat or steam.
Scope 3 emissions can be referred to as “everything else,” said Dexter Galvin, head of supply chain at CDP, which works with investors, companies and governments on environmental disclosure. This lack of definition was creating confusion and inhibiting companies from reporting their scope 3 emissions, he said.
In 2011, The Protocol created 15 categories for scope 3 emissions that have helped companies focus their efforts, said Galvin. At the same time, governments and investors have become more aware of the importance of having a holistic understanding of GHG emissions and their impact on climate change. Sophisticated measurement tools have also made it easier for companies to collect this hard-to-find data.
As a result, the number of large listed companies disclosing scope 3 emissions increased from 283 in 2008 to 801 in 2012 – an increase of 183 per cent. While only 17 per cent of the world’s large listed companies currently disclose their scope 3 emissions, this number is expected to outpace scope 1 and 2 reporting in the future, Corporate Knights Capital has found.
These numbers are encouraging, but there is still a lot of work to be done.
The 2013 Global 500 report by CDP found that “current reporting of indirect scope 3 emissions does not reveal the full impact of companies’ value chains.” The report concluded, “Current scope 3 reporting does not reflect the full impact of companies’ activities and may mislead as to the full carbon impact of a company.”
One of the main issues is that companies report the categories that are easiest, rather than the ones that are most material, said Galvin.
For example, many companies are reporting emissions from their business travel because most of them use a single supplier for their travel needs, which gives them an easy figure, said Galvin. It helps that they are also motivated from a cost perspective to reduce business travel, he added.
But transportation only makes up a small portion of corporate emissions, said Galvin. For the vast majority of global corporations, about 40 to 60 per cent of their carbon emissions are beneath the surface in their supply chains, he said.
Major western companies have effectively outsourced their emissions to emerging markets, said Galvin. But that doesn’t mean these companies can evade responsibility for the emissions created in their supply chains, he said. Global corporations collect the highest profit margins from this business model, so they are the ones with the resources to do this type of analysis, he said.
“As you move down to manufacturing facilities in emerging market, there may be less reporting capabilities on the ground. There’s an onus on major companies to support them,” he said.
This raises questions about how far down the chain companies should go in reporting their suppliers’ emissions. Corporate Knights wrote in October about the difficulties that companies have in tracking health and safety issues through their global supply chains. While it may be reasonable to expect a company to audit 30 or even 100 suppliers for health and safety, companies with thousands of suppliers are likely to find the task overwhelming or even impossible.
With that said, there is still lots of “low-hanging fruit” in emerging markets, said Galvin. The quick returns on investment that companies saw at the beginning of the sustainability push are still in early days further down in the supply chain, he said. Large companies have an opportunity to pick some of this fruit and use it to fulfill their own scope 3 reporting requirements, he said.