signals

Why companies need to take indirect emissions reporting seriously — and how they can do it

Promoting sustainability is increasingly becoming vital for corporates because of a changing regulatory environment and interest from investors, partners and customers. Yet even as companies are embracing a broad range of sustainability initiatives, they´ve been lagging when it comes to indirect emissions, or Scope 3, reporting

92%

of S&P 500 companies published sustainability reports in 2003 ^[1]

3x

As many companies have adopted net-zero goals post pandemic than did in 2019

20%

Percentage of 13,000 companies that disclosed Scope 3 data in 2020 ^[2]

Scope 1, 2 and 3 emissions: What is the difference?

Scope 3 emissions comprise of a broad spectrum of indirect emissions from a company’s upstream and downstream activities, including purchased goods and services and logistics.

Scope 1
emissions are a company´s direct emissions, such as those from its trucking fleet.

Scope 2
emissions result from the generation of the energy a company purchases.

Scope 3
emissions result from a company´s upstream and downstream activities.

75% Of company's greenhouse gas emissions are Scope 3 emissions, on average³

In some industries Scope 3 emissions far exceed Scope 1 and Scope 2 combined.

Scope 3 S1 S2 Scope 3 emissions for the tech sector and financial services sector

92%

of Apple’s emissions are Scope 3 ^[4]

84%

of Google’s were Scope 3 in 2021 ^[5]

700x

Financial services' Scope 3 emissions are ~700 times greater than their direct emissions ^[6]

Scope 3 emissions are both underreported and significant in size and impact. Quantifying and reporting them would represent a step forward in the burgeoning movement toward a net-zero corporate sector. And yet relatively few companies seem to be motivated to do so.⁸

Why companies are lagging in Scope 3 reporting?

Even if a company wants to report Scope 3 emissions, it can be hampered by the fact that its value chain partners don’t collect the necessary information.

EXAMPLE

A food and beverage company will have to obtain Scope 3 data from all of its ingredient suppliers and packaging partners, and end-of-lifecycle data from its customers.

A bank that lends to a transportation company will need to account for that company’s emissions.

In most jurisdictions around the world, reporting has been at least strongly encouraged and sometimes mandatory in cases where Scope 3 emissions were material. But interpreting what constitutes “materiality” is a subjective exercise, so companies have largely been able to navigate the regulatory waters in a way that makes their own reporting easier.

EXAMPLE

The DAX 40 index measures the performance of 40 of the largest companies on the German stock market. Only half of those 40 companies have reported on more than 4 out of the 16 categories of indirect emissions that Scope 3 comprehends. Eighteen percent of these companies have not reported Scope 3 emissions at all and another 15% have reported on fewer than 2 of the 16 categories.

A market for Scope 3 reporting services is emerging as part of the booming carbon management market and is projected to nearly double in value by the end of the 2020-2026 period. But the companies populating this market tend not to offer comprehensive services. They focus instead on niche Scope 3 sub-categories: some on supply-side/upstream activities, some on downstream activities, some on business travel emissions.

There are several reasons why such reporting service providers have limited focus areas, including the difficulty of obtaining information and the fact that the heterogeneity of the Scope 3 subcategories makes it hard for them to amass expertise. But whatever the reasons, the effect is to normalize partial Scope 3 reporting.

A transformative paradigm

UK

In the UK (where ESG reporting has been mandatory for large businesses since 2022), the Streamlined Energy and Carbon Reporting and Financial Conduct Authority regulations encourage climate disclosure and Scope 3 emissions reporting.

European Union

European Union In May 2022, the European Financial Reporting Advisory Group released a draft of the European Sustainability Reporting Standards, which require companies to report all material emissions, including Scope 3 emissions, in metric tons or their CO2 equivalents. This draft should evolve into new EU regulations that will apply to large public companies starting in 2024 and to SMEs starting in 2026. ^[11]

USA

The U.S. Securities and Exchange Commission released a proposal in March 2022 that would require all publicly traded companies to quantify and control all emissions, including Scope 3 emissions.^[9]

India

India Scope 3 reporting remains optiona ^[12]. But an August 2022 government proposal outlines India’s commitment to cutting the country’s emissions intensity by 45% by 2030 and to a long-term goal of achieving net zero ^[13] by 2070

Japon

Japan’s Financial Services Agency (FSA) aims to make climate disclosures mandatory for a major fraction of public companies from April 2023. The FSA will require companies to disclose emissions aligned to the Task Force on Climate-related Financial Disclosures framework, which is largely prescriptive, providing leeway for companies to decide the extent and granularity of emission disclosure

China

Most Chinese environmental disclosure regulations combine mandatory and voluntary measures as established by the Chinese Securities Regulatory Commission and the Ministry of Ecology and Environment (MEE). Recent updates to the disclosures that the MEE released in February 2022 confirm that a basic mandatory disclosure system is to be implemented in the next five years.

Asia-Pacific (APAC)

Asia-Pacific (APAC) While traction is picking up in the Asia-Pacific region on emissions transparency and reduction, compared to other developed economies there is a significant ambition gap in meeting Paris Agreement goals. A recent CDP report confirmed that only 23% of approximately 4,000 companies surveyed in APAC reported in the most relevant Scope 3 emission categories ^[10] and only 8% of these companies had net-zero targets in place by 2021. The APAC regulatory landscape is in the early stages of its evolution.

Latin American and the Caribbean (LAC)

Brazil and Mexico have developed national emissions programs based on the Greenhouse Gas Protocol. The programs provide guidance on holistic emissions and climate disclosures. Seventy companies in Brazil have opted into this program, participation in which is largely voluntary.

Middle East and North Africa (MENA)

Climate disclosure regulations have yet to gain traction in the MENA region. While some MENA governments have committed to net-zero goals, commitments from the corporate sector remain low. The number of companies providing climate-related disclosures to the CDP has increased over the last decade, but there remains significant scope for coverage growth, with less than 1% of MENA companies disclosing to the CDP. Given MENA’s prominent energy sector, which accounts for 75% to 95% of the region’s total emissions, Scope 3 reporting is vital

Getting ready for new reporting regimes

How should companies prepare for this new reality?

Such a partnership will become vital as carbon accounting becomes more fundamental to company decision-making processes — something that informs and even drives them, rather than a nice-to-have that’s ultimately adjacent to them.

A CFO may well factor emissions data directly into decisions about capital expenditure and M&A, to give just two examples.

In searching for reporting solutions providers, companies should examine how effective they are in collating data from sources both external - vendors and other partners, customers and so on - and internal.

They should also determine how easy it will be to integrate a certain provicer's solutions into their tech stack. Flexibility is key

We increasingly see ESG reporting following a maturity similar to that of financial reporting. Consistent with that, new providers of emission management and reporting services will need to be integrated into company financial reporting systems just as financial reporting service providers were.

Now is the time for companies to prepare their tech stacks for this integration.

Getting ready for new reporting regimes

Emerging technology frameworks to consider

Open data

The open banking framework allows financial services and other providers to utilize transaction and other data from banks to create novel products. Using an open data construct, multiple companies in the same value chain or industry can, in a permissioned manner, provide their emissions data to other companies and third-party data aggregators who will use them to model data for Scope 3 reporting purposes. The rise of an open data framework for Scope 3 reporting and the emergence of new data aggregators will promote data interoperability.

AI Models

Certain startups in the ESG reporting space are striving to make up for the informational deficiencies that hamper Scope 3 reporting by incorporating third-party data into the models they create for their client companies. It’s a promising direction, but since their work is case-by-case, it’s not scalable. AI could make it so, and Bloomberg is on the job. It has developed an AI-powered model that includes a bottoms-up estimation and top-down estimation to forecast Scope 3 emissions in cases where data is limited.

Even as governments and companies embrace sustainability, Scope 3 reporting has remained a blind spot, for a variety of reasons. But it may not be for much longer as the regulatory environment changes and as consciousness of how Scope 3 reporting can help in reaching net-zero goals spreads. Happily, there are a number of steps that companies can take to put themselves in a better position to handle Scope 3 reporting challenges and prepare for a greener, more sustainable future.

Mastercard has a broad ESG portfolio, including its Consumer Carbon Calculator powered by fintech Doconomy, the Priceless Planet Coalition, the Data and Services ESG offering and its Sustainability Lab. Mastercard's Start Path program also invests in ESG startups such as Carbon Neutral Club. It enables employees to calculate, offset and reduce their personal carbon footprints through employer-driven engagements. Leveraging the reach of a large network and broad merchant base, Mastercard could play a role in Scope 3 reporting by providing centralized and secure data and deploying a network that enables its easy distribution.

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signals

Why companies need to take indirect emissions reporting seriously — and how they can do it

92%

3x

20%

Scope 1, 2 and 3 emissions: What is the difference?

Scope 3 S1 S2 Scope 3 emissions for the tech sector and financial services sector

92%

84%

700x