Many businesses and investors continue to neglect measuring and targeting reductions in Scope 3 emissions, posing significant unreported financial risks within their supply chains. A recent report by Boston Consulting Group (BCG) and CDP underscores this concern, emphasizing the need for better accountability and action. With global standards evolving, the importance of addressing supply chain emissions becomes increasingly critical for both corporations and investors.
In previous analyses, it was observed that while companies invest significantly in reducing Scope 1 and 2 emissions, Scope 3 remains largely unaddressed. Historically, companies faced challenges in accurately measuring and managing these emissions, leading to a lack of comprehensive strategies. This trend persists despite the growing recognition of the substantial impact Scope 3 emissions have on overall carbon footprints.
Earlier reports indicated that the financial risks associated with unmonitored Scope 3 emissions are often underestimated. Comparisons with past data reveal that although the awareness of these risks has increased, the implementation of robust measures to mitigate them is still lagging. The ongoing evolution in disclosure requirements underscores the urgency for companies to integrate Scope 3 emissions into their environmental strategies effectively.
Underreporting Emissions
Scope 3 emissions constitute a majority of most companies’ overall emissions. The report highlights that supply chain emissions reported for 2023 were on average 26 times higher than companies’ Scope 1 and 2 emissions. Despite the overwhelming scale, companies are twice as likely to measure and set targets for Scope 1 and 2 emissions than Scope 3. This discrepancy underscores the significant unreported risks that could materially impact corporate performance.
Scope 3 data is no longer a nice to have. Financial markets stakeholders, from corporates to investors, must scale up the level of accountability and action to match the scale of supply chain emissions.
Significant Financial Risks
The report estimates a potential $335 billion carbon liability from upstream emissions in the top three Scope 3-emitting sectors: manufacturing, retail, and materials. Despite this liability, only half of the companies surveyed evaluate the financial risks from upstream emissions. Moreover, only about a third of investors have policies requiring climate-related disclosures from investee companies, with few mandating Scope 3 emissions reporting.
Supply chain emissions are, on average, 26 times greater than a corporate’s operational emissions. Hence, aligning climate ambitions across the supply chain helps drive a disproportionate impact on emissions.
The report identifies three key factors that significantly influence action on Scope 3 emissions: a climate-responsible board, supplier engagement, and internal carbon pricing. Companies with climate oversight at the board level, those engaging with suppliers on climate issues, and those adopting internal carbon pricing are significantly more likely to set and achieve Scope 3 targets aligned with a 1.5°C transition plan.
The study found that 34% of companies have a climate-responsible board, 41% engage with suppliers on climate issues, and 14% use an internal carbon price. These factors are crucial for driving significant reductions in Scope 3 emissions. Boards must push for increased oversight on upstream emissions to mitigate regulatory, reputational, and operational risks effectively.
Addressing Scope 3 emissions is becoming increasingly imperative as global standards and mandatory reporting rules evolve. Companies and investors must work collaboratively to enhance transparency and accountability, ensuring that supply chain emissions are not overlooked. Implementing comprehensive strategies to manage these emissions will be essential for mitigating financial risks and achieving long-term sustainability goals.
