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Will Earth Day trigger companies to tackle Scope 3 emissions?

By April 20, 2021April 21st, 2021No Comments
By Tim King
Tim King

Earth Day has been a Catalyst for Change since 1970 and we expect 2021 to be no different

As the Climate Council notes in its recent report1, “there is no safe level of global warming. Already, at a global average temperature rise of 1.1°C, we’re experiencing more powerful storms, destructive marine and land heatwaves, and a new age of megafires”.

Earth Day 20212 – held every year on April 22 – will likely see the announcement of bold plans to take action to address this problem. Historically Earth Day has been the catalyst of many environmental developments such as the creation of the United States Environmental Protection Agency and the passage of other first of their kind environmental laws.

This week on Earth Day US President Biden will host a global leader’s Climate Summit where key world leaders will be invited to make new, enhanced emissions reduction commitments—so-called nationally determined contributions (NDCs)—to reduce their global warming emissions. The U.S. NDC is slated to be announced at the summit and it is expected to involve an ambitious plan to cut U.S. greenhouse gas emissions between now and 2030.

Source: Climate Council Aim High, Go Fast report3

The key emissions reduction challenge for companies is that typically the vast majority of emissions occur in the value chain – Scope 3 emissions4 – which are complex and difficult to measure, let alone manage.

By Tim King

Earth Day has been a Catalyst for Change since 1970 and we expect 2021 to be no different

As the Climate Council notes in its recent report1, “there is no safe level of global warming. Already, at a global average temperature rise of 1.1°C, we’re experiencing more powerful storms, destructive marine and land heatwaves, and a new age of megafires”.

Earth Day 20212 – held every year on April 22 – will likely see the announcement of bold plans to take action to address this problem. Historically Earth Day has been the catalyst of many environmental developments such as the creation of the United States Environmental Protection Agency and the passage of other first of their kind environmental laws.

This week on Earth Day US President Biden will host a global leader’s Climate Summit where key world leaders will be invited to make new, enhanced emissions reduction commitments—so-called nationally determined contributions (NDCs)—to reduce their global warming emissions. The U.S. NDC is slated to be announced at the summit and it is expected to involve an ambitious plan to cut U.S. greenhouse gas emissions between now and 2030.

Source: Climate Council Aim High, Go Fast report3

The key emissions reduction challenge for companies is that typically the vast majority of emissions occur in the value chain – Scope 3 emissions4 – which are complex and difficult to measure, let alone manage.

Climate Action in the Value Chain – the Challenge of Scope 3 Emissions Reduction

By definition, a company’s Scope 3 GHG5 emissions – indirect GHG emissions that occur in the value chain of the reporting company- occur outside of the company’s operated assets and are emissions over which they do not have operational control. The lack of direct control and difficulty collecting high quality data typically make the measurement and targeting of Scope 3 emissions difficult. Consequently, until recently, corporates have largely focused their attention on emissions under their own operational control and from their purchases of electricity (Scope 1 and Scope 2 emissions), despite the fact for many companies Scope 3 emissions represent the majority of emissions.

Overview of GHG Protocol scopes and emissions across the value chain

Source: Corporate Value Chain (Scope 3) Accounting and Reporting Standard, GHG Protocol

Australia’s Scope 3 Emissions Reduction Challenge is Significant

Australia’s Scope 3 challenges are much larger relative to other countries. Using EMMI’s6 proprietary emissions modelling, scope 3 emissions represent 88% of ASX 300 emissions compared to 75% for the global universe7.

Furthermore, only 6% of ASX300 companies are considered by EMMI as providing accurate disclosure of their Scope 3 emissions, either because Scope 3 emissions are not disclosed at all, only a portion of Scope 3 emissions are disclosed, or the estimates of scope 3 emissions are inaccurate because collecting of data typically make measurement difficult.

The disproportionate size of Australian companies Scope 3 emissions and the weak starting point given the poor data quality therefore make the management of Scope 3 emissions a particularly challenging issue.

Source: EMMI

Source: EMMI

The Importance of Scope 3 Measurement and Targets

Despite these challenges, for the same reasons that companies are targeting Scope 1 and Scope 2 emissions reductions, targeting Scope 3 emissions reductions is important for:

  • mitigating risks within company value chains. For example, Rio Tinto (not held) identifies thermal coal, oil and gas and metallurgical coal as having higher scope 3 risk because of substitution risks from renewables and hydrogen
  • unlocking new innovations and collaborations
  • responding to mounting pressure from investors, customers and civil society
  • preventing the worst impacts of climate change

Examples of companies taking Scope 3 action

TLS (held): Telstra is partnering with its suppliers to improve the data quality of its supply chain emissions to manage and reduce its overall scope 3 emissions footprint.

RIO (not held): has developed the following Scope 3 goals:

  • Working in partnerships with customers on steel decarbonisation pathways and investing in technologies that could deliver reductions in steelmaking carbon intensity of at least 30% from 2030;
  • Working in partnerships to develop breakthrough technologies with potential to deliver carbon neutral steelmaking pathways by 2050;
  • Work in partnerships to develop breakthrough technology enabling the production of zero-carbon aluminium;
  • ambition to reach net zero emissions from shipping products by 2050.

Melior’s Response

Melior actively engages with companies to include targeting a reduction in scope 3 emissions in their transition targets and shares examples of best practice companies already moving towards identifying and managing scope 3 emissions.

Melior also aims to help the transition to a low carbon economy through:

  • Setting a science based portfolio emissions target vs ASX300 and a 2030 strategic goal that all companies in its sphere of influence have net zero emissions targets;
  • Making public submissions including recently making a Climate Change Bill submission and a submission to Victoria’s Embedded Networks review to support microgrids;
  • Developing an in-house certified carbon calculator to estimate and scenario test ASX300 company emissions;
  • Avoiding fossil fuel companies and companies with material supply chain exposure;
  • Investing in companies aligned to Climate Action, Renewable Energy and Sustainable Infrastructure Investment Themes ;
  • Educating and influencing through thought pieces, media, seminars and engagement with universities;
  • Having our business operations certified as Carbon Neutral by Climate Active.

Glossary

Scope 1: Direct GHG emissions that occur from sources that are owned or controlled by the reporting company, i.e., emissions from combustion in owned or controlled boilers, furnaces, vehicles, etc.
Scope 2: Indirect GHG emissions from the generation of purchased or acquired electricity, steam, heating, or cooling consumed by the reporting company. Scope 2 emissions physically occur at the facility where the electricity, steam, heating, or cooling is generated.
Scope 3: All other indirect GHG emissions (not included in scope 2) that occur in the value chain of the reporting company. Scope 3 can be broken down into upstream emissions that occur in the supply chain (for example, from production or extraction of purchased materials) and into downstream emissions that occur as a consequence of the use of the organization’s products or services. 

Sources

This content is for general information only. In preparing and publishing this content, Melior Investment Management Pty Ltd (ACN 629 013 896, authorised representative no. 001274055) does not seek to recommend any particular investment decision or investment strategy and has not taken into account the individual objectives, financial situation or needs of any investor. Investors should consider these matters, and whether they need independent professional financial advice, before making any investment decision.