The EU’s Green Deal will change the way scope 3 emissions are handled by companies trading in the EU forever. For the first time, it will be mandatory for companies to report on the scope 3 emissions and how they address their scope 3 emissions. Scope 3 emissions refer to the indirect, i.e. supply chain emissions caused by a company’s activities, and can make up more than 80% of a company’s total emissions. Scope 1 & 2 emissions result from a company’s own operations.
The EU has set itself the goal of becoming climate neutral by 2050 and reducing emissions by 50% by 2030. To achieve this, regulators and companies in supply chains will have to work together. Far from being a punishment, mandatory reporting will help companies improve their practices, as it allows for comparable data between companies, and also helps them evaluate and build on their achievements in previous years. The cascading effect of mandatory scope 3 emissions reporting will create an environment where companies have to collaborate and share information to make their supply chains sustainable, from the first to the last mile.
Of the EU Green Deal’s ten action points, three relate to reporting. Companies need to follow the European Sustainability Reporting Standards (ESRS) where reporting related to climate change is mandated. Companies should take an increased interest in stakeholder activity to gather the data they need to meet reporting requirements.
For companies who, until now, considered the value-chain outside their purview, this will seem a difficult task. They’ll need to take stock of their position within the supply chain, and harness its untapped potential to improve their practices. Alone, one link in the chain can’t change everything, but if the entire chain acts together, it can be extremely powerful.
Large companies will request emissions data from their suppliers, so, in order to remain competitive, suppliers will need to produce that data. Companies like Satelligence and EY help with reliable data-gathering and verification, stimulating the downstream market and building the infrastructure that will make scope 3 reporting a reality. In this way, increased collaboration between stakeholders will be a positive consequence of mandatory reporting.
For stakeholders to collaborate effectively, they’ll need reliable emissions and supply chain data. Scope 3 emissions are a complex thing to measure; doing so requires information sharing between companies all along the supply chain. It also requires tools that are capable of measuring, to a degree of scientific reliability, how much scope 3 emissions are being emitted as a result of company and supplier activities, as well as gathering farm boundaries and ownership data to create clear lines of accountability. Methods will have to be sharable and scalable.
Another element of the Green Deal that companies will have to pay attention to is the Corporate Sustainability Reporting Directive (CSRD), which will introduce a slew of new data points for companies to collect. As such, companies will have to update their IT systems to keep up with the variety of data they’ll need to organise. Sustainability data is so broad that it’s difficult to collect within one system. Data on sustainability, health and safety, social issues and corruption, is, by its nature, variegated. Carbon measurements, for example, still contain an element of estimation for storage and emissions. Accurate data collection and the procedural upgrades required will increase transparency between stakeholders, creating more open, more environmentally friendly supply chains.
Satelligence combines the latest satellite monitoring technology with highly trained machine learning algorithms to monitor changes to carbon emissions over time. They also provide deforestation and other environmental risk alerts in real-time, allowing companies to capture scope 3 emissions before they’re emitted. When combined with supply chain linkage information, companies can get a clear picture of their scope 3 emissions and take action by engaging with suppliers.
The transparency that mandatory reporting creates also empowers stakeholders to make greener choices, and streamline sustainable practices. From employees to investors, stakeholders are taking more of an interest in the green credentials of companies. These benefits are no accident, the reporting requirements of the ESRS are there to help companies reconsider their strategies and business models by design.
Traditionally, environmental and social reporting aspects in the supply chain have been voluntary, so scope 3 has often been kept at a distance. ESG investing and mandatory reporting requirements will change that. Companies will now have to report on the impact of business activities on the environment, their workers, and the communities they operate in.
The CSRD introduced this new paradigm with the concept of double materiality. Double materiality takes the impact of a company’s business activities on society and the environment into account, as well as the extent to which it affects a companies’ ability to create value and drive profits. In accepting responsibility for environmental and social impact, companies will have to take control of their activities by exerting influence over the supply chain, obtaining reliable data, and improving practices over time.
EY helps companies with setting up reliable data collecting processes, verifying supply chain data, and increasing transparency. They also provide auditing services that add credibility for the benefit of stakeholders. If reporting on scope 3 emissions seems overwhelming, fear not. One company’s scope 3 emissions are another’s scope 1 and 2 emissions. Shared responsibility is necessitated by the interlinked nature of supply chains; stakeholders are all relying on one another to gather data and improve practices. In this sense, the ESRS and other mandatory reporting requirements give companies an opportunity to get to know, and take control, of their supply chains.