Top 3 Challenges with Scope 3 Reporting
“About half of institutional investors say a lack of robust ESG data is ‘holding back’ their organization’s further adoption of ESG”, according to a recent global survey by Capital Group.
Investors increasingly require companies to disclose non-financial key performance indicators around environmental, social, and governance ("ESG") matters. They use these metrics to assess risks and screen investments across specific impact categories.
“ESG is an increasing area of focus for institutional and wholesale investors globally” said Jessica Ground, Capital Group’s Global Head of ESG. “While investors appreciate the importance of ESG integration...they also report that the lack of robust and consistent data is the main challenge when investing in ESG.”
U.S. ESG funds under management reached a combined value of $330 billion in September 2021, and they will only continue to to attract more capital in the future.
Many praise the importance of ESG integration into investment strategies. Others view ESG as a hoax - a crafty way of slapping a “sustainable” label on an organization without any effort to substantiate the claims.
While hype and controversy may continue to surround ESG, one thing is certain - companies need to ensure that they are reporting accurate and consistent data to stakeholders.
The “E” in ESG
One metric that has become ubiquitous with ESG is Scope 3 Emissions, more formally known as the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting framework. Since it deals with greenhouse gas emissions, it falls under the “Environmental” pillar of ESG.
Scope 3 emissions quantify a company’s indirect greenhouse gas emissions throughout the corporate value chain. This includes everything from the impact of purchased products and services to transportation and distribution all the way to end-of-life treatment of sold products. In total, there are 15 Scope 3 categories that need to be accounted for (although not every category may be relevant to organizations).
GHG Protocol Scope 3 Emission Categories (courtesy of the Greenhouse Gas Protocol)
While most large organizations report Scope 3 emissions to some degree, the pressure for more detailed and robust disclosure is growing. This places corporations in a tough position, because Scope 3 emissions are notoriously difficult to fully capture.
Corporations will need to carefully analyze their upstream and downstream supply chains to gather the data needed to meet stakeholder demands.
Water, Water Everywhere and Not a Drop to Drink
Today, corporations and stakeholders are drowning in data. Some of it is good, some bad. Some of it is just useless noise. Knowing which is which is a challenge for companies expected to report on Scope 3 emissions.
Here are three challenges reporting companies can expect in the near future:
1. Reliance on Value Chain Partners
As mentioned previously, companies will need to carefully analyze their upstream and downstream supply chains. This means starting with a full inventory of all upstream and downstream activities as they relate to the fifteen Scope 3 activity categories.
However, many companies have extremely complex operations that may involve dozens of suppliers and numerous products sold through a variety of channels.
A large number of supply chain partners can be difficult to manage. Reporting companies may struggle to ensure all relevant partners are accounted for and that they’re providing sufficient information. In some cases, partners may not be motivated to provide complete data in a timely manner, so companies will also need to closely manage and engage them in the process.
In addition, the reliance on value chain partners results in less influence from the reporting company over data collection, management and quality control. They may also lack transparency into partners’ data collection and calculation processes, which reduces the overall quality of information exchanged.
2. Data Gaps
Reliance on supply chain partners can also contribute to noticeable data gaps in the Scope 3 inventory.
Supply chain partners may be unable to provide all of the information required for Scope 3. This could be attributed to a lack of primary activity data (e.g. pounds of waste diverted to recycling in stores), or a lack of knowledge about sourcing secondary data (e.g. industry averages for retailer recycling rates gathered from public databases).
Furthermore, if the Scope 3 boundary is not properly defined and communicated to partners, they could be unintentionally omitting activity categories from their data collection and calculation process.
Even if data is available, partners may be hesitant to provide this information. Data privacy and intellectual property are at more risk than ever. As a result, partners may be unwilling to disclose confidential information for fear of privacy breaches and legal ramifications.
3. Poor Data Quality
When data is obtained by partners, there is no guarantee that it is high quality or encapsulates the right scope of information.
Many companies lack access to primary activity data, and need to rely on secondary data and underlying assumptions. While this may provide a ballpark estimate for emissions, investors may demand more transparency and reasoning behind the use of secondary data.
Furthermore, supply chain partners might lack the experience in greenhouse gas accounting to provide accurate data. If the scope of information requested is not properly understood, partners could be gathering the wrong activity data. On top of that, partners may fundamentally lack the knowledge needed to properly calculate emissions and assure the data for accuracy.
Product Intelligence: The Truth is Out There
Addressing the challenges associated with Scope 3 emissions begins with a solid foundation of transparent, verifiable activity data. Smarter Sorting gives retailers an easy way to access primary activity data and ensure robust Scope 3 reporting.
In 2021 alone, the Product Intelligence Platform (the central place for retailers to get fast answers on every important detail on the products they carry, including waste codes, transportation regulations and disposal classifications) was adopted by 1,223 brands and 24 major retailers.
The Product Intelligence Platform delivers product-level insights to help retailers aggregate data and calculate Category 1 (Purchased Goods and Services) Category 11 (Use of Sold Products), and Category 12 (End-of-Life Treatment of Sold Products) emissions.
In addition, the Back of Store System complements the Product Intelligence Platform by providing real time primary data for waste that can be directly plugged into Category 5 (Waste Generated in Operations) calculations.
By quickly accessing data, retailers can reduce the need to rely on secondary data to estimate emissions. This may also decrease the need to inundate supply chain partners with information requests and ensures that data is more complete and accurate. Plus, the data can be shared with manufacturers to help them fill in end-of-life data gaps for their own Scope 3 reporting.
As supply chains and corporate operations increase in complexity, reporting Scope 3 emissions will continue to be challenging for retailers. But with direct access to primary activity data, navigating the complexities of Scope 3 is becoming much easier.
Gone are the days of struggling to meet stakeholders’ demands for accurate, complete, and transparent ESG reporting. Retailers now have a viable solution to start showcasing real impact where it matters.