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Scope 3 disclosure is a new headache for CEOs: Here’s the painkiller

Sponsored: As governments up the ante on Scope 3 emissions disclosure, here’s how businesses can get access to data they can trust for reporting. Read More

(Updated on July 24, 2024)
The fields in this part of eastern Kazakhstan follow the contours of the land—long and narrow in mountain valleys

The fields in this part of eastern Kazakhstan follow the contours of the land—long and narrow in mountain valleys

This article is sponsored by SustainCERT.

As governments and other institutional bodies up the ante on Scope 3 emissions disclosure, the question of how to report on these emissions is an issue that’s rapidly sliding up the company hierarchy.

For CSR and, increasingly, senior leadership teams, reporting means data. But getting one’s hands on the right data and knowing what to measure when it comes to Scope 3 isn’t easy. The current state of climate data — in all its forms — currently leaves much to be desired.

The world’s CEOs need climate data they can trust. In a world where awareness of greenwashing is growing, and investors’ and shareholders’ expectations around GHG emissions reporting are increasing, no company can risk going public with figures that might not stand up to scrutiny.

The good news is there are ways for companies to ensure their Scope 3 data reporting is as accurate as (currently) possible. Here are the top three actions CEOs should take to enhance their Scope 3 reporting.

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Small, blocky shapes of towns, fields, and pastures surround the graceful swirls and whorls of the Mississippi River. Image courtesy of USGS, Unsplash.

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Small, blocky shapes of towns, fields, and pastures surround the graceful swirls and whorls of the Mississippi River. Image courtesy of USGS, Unsplash.

1. Aim for supplier or supply region-specific data

Many companies have long relied upon global averages to assess their supplier emissions. As reporting standards become more stringent, though, it’s clear we can no longer rely on global averages to assess the carbon intensity of supply chains that are local by nature. A small-scale organic meat producer operating in a healthy ecosystem will inevitably have a very different emissions profile from a large-scale producer in a country with a high rate of deforestation.

This means companies need to start using supplier-specific data or, at the very least, supply region-specific data to figure out their exact supply chain emissions and accurately report progress. This data has traditionally been difficult to access, but we’re seeing the emergence of a new generation of climate data sets that are granular enough to paint the differences in emissions profiles associated with different suppliers.

By using more localized data, companies can paint a much more accurate picture of emissions on the supplier end of their value chain, enabling them to know where to invest to reduce emissions and to report with more certainty that the numbers are correct.

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Macro photo of the detailed patterns of a log washed up on the beach at Georges Bay in Tasmania, Australia. Image courtesy of David Clode, Unsplash.

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Macro photo of the detailed patterns of a log washed up on the beach at Georges Bay in Tasmania, Australia. Image courtesy of David Clode, Unsplash.

2. Get your data verified by an independent third party

When it comes to climate data, if it’s not verified, it’s unlikely to be true. A 2021 study by the Technical University of Munich, for example, found that the self-reported emissions of 56 software and hardware manufacturers on the 2019 Forbes Global 2000 list were underestimated by 391 megatonnes of CO2 equivalent. To put this in perspective: That amount is roughly equivalent to Australia’s total annual emissions.

Moreover, it’s only a matter of time before every single ESG claim will have to be verified. Indeed, regulators are starting to ask for it: The European Union carbon border adjustment mechanism requires EU importers to report emission factors verified by third parties on selected goods. An emission factor is the ratio between the amount of emissions generated and the amount of a given raw material processed. Scope 3 reporting is also central to the International Sustainability Standards Board, whose standards are likely to be adopted globally within the next three to five years. To face looming regulations, going for verification now means being prepared for what’s inevitably coming.

To ensure the data they’re gathering is correct, businesses should turn to independent verifiers to confirm their data sets and calculation engines are producing outputs that can be trusted. After all, businesses can’t suddenly be expected to be climate data experts — this is the job of verifiers, who have the knowledge and tools to put a credible stamp of approval on companies’ Scope 3 reporting.

3. Lobby for government standards

It may seem counterintuitive to say businesses should lobby for regulation that will give them more work, but the truth is that it will only benefit them in the long run. Regulation is what’s ultimately going to move the needle. Voluntary action won’t get us to a net-zero world. The good news is, regulation is coming. But it’s worth making sure it is fit for purpose. How can we do this?

First, regulation needs to improve the comparability of reporting. This means standardization and harmonization. There is now widespread acknowledgement that the climate data reported by companies is not comparable. This is largely because companies use different data points and processes, making it difficult to compare and know who is leading a sector when it comes to climate action.

Why does this matter? Well, the absence of a level playing field means every company is put in a risky position. Without globally accepted reporting standards, no one can be sure their reporting is accurate nor determine exactly where they stand in the carbon rankings nor can they be reassured they won’t be put at a disadvantage versus competitors that may be picking and choosing rules that benefit them most

Moreover, without a common framework or more stringent reporting standards, many industries lack the impetus to come together and invest in the localized data sets they need to improve the accuracy of their Scope 3 emissions analysis. It’s a chicken-and-egg situation. Standardized climate data reporting will reduce a company’s risk overall (in terms of investors and public image) and allow them to truly know where they stand in the carbon rankings.

Second, regulations need to improve the comprehensiveness and stringency of reporting. This means including Scopes 1, 2 and 3 data, along with climate-related risk, in disclosure requirements. The recent decision by the ISSB board to confirm scope 3 GHG disclosure requirements is going in the right direction.

Third, we have to enhance the quality of reporting. This means third-party verification of reporting to ensure the numbers being reported are all true. The way to accelerate the shift towards common data frameworks and verified, localized data points is to make independent verification of GHG accounting mandatory. This means treating carbon accounting like financial accounting and requiring companies to audit their emissions comprehensively every year.

There is already some movement towards this in the regulatory space: The U.S. Securities and Exchange Commission and the European Union are introducing a common set of standards in the U.S. and Europe. But until these climate disclosure frameworks become legal in a few years’ time, companies will continue to report inaccurate numbers (a huge risk for them) or hide behind the lack of (accurate) data as a way to avoid taking action.

As we move into this year’s COP27, businesses would be wise to support the discussions around implementing more stringent, comprehensive and standardized Scope 3 standards and disclosure as a way to protect themselves in the long run.

Scope 3 is complex, but not impossible to crack

There is no credible climate action without meaningful Scope 3 action — and no meaningful Scope 3 action without Scope 3 data.

In truth, Scope 3 data is one of the most complex issues to crack when it comes to making net zero a reality. But progress is being made: At a high level, solutions already exist when it comes to independent verification, allowing companies to show the substance behind their sustainability strategy. We’re also seeing the increasing emergence of more localized, granular supplier data sets, which will only increase as Scope 3 reporting regulation becomes more stringent.

These three things: Data verification, supplier-specific data sets and common Scope 3 reporting standards are the new frontier. The proof is always in the data: Our ability to really tackle Scope 3 (rather than just saying that we are) as we move towards 2030 will be determined by their uptake and rollout.

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