Arabian Business

What are scope 3 emissions and why should your business care?

What are scope 3 emissions and why should your business care?

Scope 3 emissions, which are greenhouse gas emissions produced indirectly, contribute a massive amount of companies’ indirect emissions. Lowering them is essential for brands to achieve their sustainability goals

  • January 28, 2022
  • min read

Arabian Business

What are scope 3 emissions and why should your business care?

Scope 3 emissions – or indirect greenhouse gas emissions that arise from other value chain activities – are some of the hardest for a company to control.

For example, scope 3 emissions includes the emissions employees let off into the atmosphere on their commute to work.

How massive corporations will lower their scope 3 emissions in cities where individuals primarily rely on personal vehicles to get to work is a real and pressing challenge modern corporations must address.

As companies frantically continue to try to reduce their impact on the environment, they’ll need to increasingly address emissions at all ends of the value chain.

Many companies have begun to tackle direct emissions, known as scope 1, but lowering scope 3 emissions is particularly challenging for corporations.

Arabian Business sat down with Tom De Waele, managing partner at Bain & Company Middle East to discuss what scope 3 emissions are, why they’re important and what companies can do to lower their scope 3 emissions.

Why are scope 3 emissions the next big thing for companies to focus on?

Many businesses across all industries, from retail and financial services to aviation and healthcare have been affected by scope 3 emissions. For many businesses, in the consumer industry especially, more and more brands are focusing on environmental, social and governance goals, with the reduction of scope 3 greenhouse gases (GHG) emerging as one of six key corporate targets.

The others include material waste, water management, health and wellness, diversity and inclusion, as well as fair sourcing. UK supermarket leader, Sainsbury’s, is making carbon reduction a cornerstone of its strategy, with pledges to reduce scope 1 and 2 emissions to net zero by 2040, and working with suppliers to cut scope 3 emissions by 30 percent by 2030.

Among the concrete steps the retailer has taken recently are switching to energy-saving lithium-ion pallet trucks, and installing its millionth aerofoil, a technology that saves energy in open refrigeration displays.

Scope 3 emissions are probably the greatest amount of emissions that companies produce indirectly, so it will be important for brands to achieve their sustainability goals, with the benefits to wider society of a greener business environment. Cemex sells a range of concrete, Vertua, which contains 70 percent less embodied carbon and offsets the rest of its emissions to deliver a carbon-neutral product.

Also, Upfield, a producer of margarine and other spreads, has identified the opportunity to reposition itself as a leader in plant-based foods by introducing carbon labelling to help consumers make better food choices based on emissions data.

It’s worth noting that, despite their ambitions to reduce scope 3 GHG emissions, many consumer-focused companies will fall behind in this challenge, as these are the most difficult to manage, reliant as they are on both consumers’ and suppliers’ actions.

What are scope three emissions?

Simply put, the greenhouse gas emissions generated by a company during its operations span three categories:

  • Direct emissions generated by assets owned or operated by the company (scope 1)
  • Indirect emissions are generated from the purchase of energy; e.g. electricity, heat, steam (scope 2).
  • Scope 3 emissions are indirect emissions that arise from all other value chain activities – both upstream and downstream (including end user purchase).

For example, let’s say you manage a fashion brand that produces clothing. This means you must manage emissions from the production and processing of the raw material, such as cotton, plus emissions from the saleable garment’s manufacture, as well as the elements of packaging, distribution, and delivery.

There’s more – let’s say your employees commute by car, bus or train, or fly to visit customers and suppliers, these are also scope 3 emissions. Once the customer has bought the garment then its laundering and drying throughout its useful life also come under the scope 3 umbrella. Plus, at the end of the garment’s useable life, when the customer no longer wears it, the way it is disposed of or recycled also generate indirect emissions in the scope 3 category.

This is why scope 3 emissions are so important to control – as both a firm’s upstream and downstream operations make up the lion’s share of their generated emissions.

How does policy need to support the creation of scope 3 emissions plans?

Policies vary from country to country across the GCC and wider MENA region, with a range of frameworks either under development or already implemented to varying degrees of success, however, we also see that most GCC governments are aligning to global best practice and worldwide climate change agreements, such as COP 26.

As the COP 26 event drew to a close in Glasgow recently, some participants were buoyed by the prospects of aggressively attacking climate change and limiting global warming to 1.5 degrees Celsius through their actions over the next decade, one sobering truth remained clear: There’s an overwhelming amount of work ahead for governments, financial institutions, and corporations in terms of policy creation and implementation.

COP 26 did produce some encouraging policy results, such as strong commitments and international agreements, including the more than 100 countries representing a major share of the world’s forests pledging to halt deforestation by 2030.

Parties also agreed to update 2030 targets in 2022 rather than in five years, and they also closed loopholes around some legacy, poor-quality carbon credits. Some accomplishments were thwarted by disregard, such as the commitment to reduce methane that wasn’t signed by several key emitters or the pledge to end investment in new coal power generation that failed to garner support from countries representing 70 percent of the world’s coal production.

But whatever happens on the policy side, much of the real work of the climate transition will be driven by finance and private companies, which were at the COP 26 table in a serious way for the first time. BMW, a leading manufacturer of premium automobiles and motorcycles, also plans to reduce carbon emissions across the entire life cycle of its vehicles, from production through ownership, by at least 40 percent by 2030. It is including CO2 performance in its decision process for awarding contracts. Other automakers are committing to procure low-carbon steel now, since supply might be constrained in years to come.

What are examples of scope 3 emissions policies that companies can put in place?

Scope 3 emissions are a consequence of the activities of the company but occur from sources not owned or controlled by the company. This makes for quite a challenging management environment.

However, listed below are six elements that can help companies manage their scope 3 emissions:

Set the ambition, assign responsibilities and make a plan

Develop an actionable decarbonisation goal while accounting for costs, make P&L owners responsible, and agree on a structured plan linked to value.

Identify and prioritise your hotspots

Calculate which activities (suppliers, products, consumer behaviours) contribute the most to emissions, from an upstream and downstream perspective.

Don’t rely on others, work with others

Help your suppliers and consumers do better by controlling what you can and supporting them where needed. Create dialogues and partnerships with relevant stakeholders to succeed.

Globally, climate-related behaviour increasingly influences investment decisions. The Net Zero Asset Managers Initiative brings together 128 fund managers with $43 trillion under their care in a pledge to make investment decisions that support the goal of net-zero emissions by 2050 or sooner.

Set aside a clear budget

Allocate an annual sustainability budget, motivating employees with such incentives such as extra capex for early movers. Also, linking short-term and long-term incentives to the transition ensures it remains on the agenda. Leading companies have a significant share of variable pay linked to sustainability and deploy these incentives across the organisation. For example, Danone ties 20 percent of senior executives’ annual compensation to social and environmental targets.

Embed carbon reduction in ways of working 

Use decarbonisation to inform business and management decisions across the organisation.

Track your results

Acquire, set up, and connect reliable data sources to understand how your emissions are evolving.

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