June 19, 2024

Scope 3 emissions a ‘best guess’ for financial services providers, says survey

Fewer than half of financial services organisations are “very confident” they can accurately report on Scope 3 emissions, while more than two-thirds (69%) feel Scope 3 reporting is a “best-guess” measurement, according to a survey of procurement leaders conducted by procurement and supplier management specialist Ivalua. 

While “best guess” implies organisations do not really know what they are doing and are taking a shot in the dark, Jarrod McAdoo, director of sustainable procurement at Ivalua, says organisations are being “overly honest” by saying it is a “best guess”. 

“They’re not trying to oversell what they’re doing, but they may be underselling it as well,” he says. “We would probably serve ourselves and procurement better if we started referring to some of our business actions in more scientific terms like ‘hypothesising’. A lot of people are committed to doing something, but they also recognise that there are challenges in getting the information. They understand these challenges, and they’re moving forward.”

Scope 3 emissions are the most difficult to report on, because unlike Scope 1 and 2, they are not directly associated with a company, but are indirect emissions generated upstream (from things an organisation purchases) and downstream (from products or services it sells). Value chain emissions, as they are sometimes referred to, encompass 15 categories, including things like franchises, investments, waste, employee commuting and end-of-life of sold products. 

In many cases, Scope 3 emissions can account for more than 70% of an organisation’s carbon footprint, but gathering the information needed to report on them can be difficult for organisations like banks, says Mr McAdoo, because they rely heavily on individuals outside their control to gather the information needed. 

Concerns about unintentional greenwashing

Yet, Scope 3 emissions disclosure is increasingly becoming a regulatory requirement. The EU’s new Corporate Sustainability Reporting Directive, which came into force on January 1, requires the 50,000 or so companies that are expected to fall within its scope to report Scope 3 emissions.

The UK government is also considering including Scope 3 in its Streamlined Energy and Carbon Reporting framework, and has launched a call for evidence to gather feedback “on the benefits, costs and practicalities of Scope 3 greenhouse gas emissions reporting in the UK”.

With pressure from both customers and regulators to ensure all green claims are legitimate, Ivalua’s research of 850 procurement leaders from the UK, US, Germany, France, Sweden, the Netherlands and Italy, which included more than 100 respondents from financial services organisations (finance, insurance and accounting), reveals, more than half (55%) of financial services organisations are concerned that they could be at risk of unintentional greenwashing.

While 85% of financial services organisations are confident they are on track to meet their net zero targets, many still do not have comprehensive, fully implemented plans in place for:

  • reducing water pollution (75%)
  • adopting renewable energy (67%) 
  • reducing carbon emissions (67%) 
  • adopting circular economy principles (67%)
  • reducing air pollution (67%)

While a lack of perceived progress could fuel accusations and fears of greenwashing, Mr McAdoo says many sustainability programmes are in their infancy, and organisations need to start somewhere. “Estimated data can help determine climate impact and contribute to building realistic, actionable net zero plans,” he says. “Over time, organisations will need to make significant progress on obtaining primary Scope 3 data and putting plans in place, or risk financial penalties as well as ruining reputations in the long run.”

Do not fixate on 100% accuracy

Last year saw regulators start to clamp down on greenwashing or misuse of terms such as ‘green’, ‘sustainable’ or ‘ESG’, but Mr McAdoo expects a lot of things will get litigated in the court of public opinion.

“You could think of a scenario where I’m a financial services organisation,” he says, “and I’m now required to report on all the efforts I’m doing. If I’m in the EU, and I’m doing my double materiality assessment on my supplier base, if I have 10,000 suppliers, I might determine only 100 of my suppliers are really material to the business and environmental impacts. I could follow all the rules, but it only takes one advocate to pick up that information and say: ‘Well, these guys are only tracking 100 of 10,000 and most of their emissions come from Scope 3 so they’re leaving out more than 90+% of their supply base.’ The optics of that might look like greenwashing. We’re just going to have to have those continuous conversations between the regulators, the public and organisations, so we all get a good understanding of what this really means.” 

To build trust and credibility in sustainability programmes, organisations need to find ways to best measure and gauge the impact of their Scope 3 emissions, said Oliver Hurrey, founder and chair at the Scope 3 Peer Group, a cross-industry, global collective focused on supply chain emissions reduction. 

But absolute accuracy could be hard to achieve without significant investment, he adds. “Organisations shouldn’t spend time and money fixating on 100% accuracy. Instead, they need to equip procurement teams and the wider business with good data and insights. This will empower procurement teams to start taking action to identify unsustainable suppliers and ensure the business is headed in a greener direction,” he says.

Working with suppliers will be vital in achieving net zero. However, Ivalua’s research reveals that ineffective supplier collaboration (24%) is among the top challenges for financial institutions to overcome.

“Nearly two-thirds of financial services organisations agree that an inability to measure supplier emissions accurately makes it hard to turn words into action,” says Mr McAdoo. “There is a clear need to adopt a smarter approach to procurement. Organisations need granular visibility into their supply chains to ensure they can measure the environmental impact of suppliers, but also collaborate with suppliers to develop improvement plans. Only with this transparency can organisations showcase meaningful sustainability progress and avoid accusations of greenwashing.”

But does a smarter and more granular approach to procurement mean not doing business with suppliers that do not play ball when it comes to providing information to help financial services better and more easily calculate their Scope 3 emissions?

Mr McAdoo says if organisations are not careful, a lot of the stuff they’re doing on ESG could cannibalise one another. “If you want to go down the route of saying, ‘I need a sustainable supplier, I need them to track their emissions and provide their data to me or I’m not going to do business with them’, these might be the same suppliers who were locally owned, or a small business you cultivated through another part of your ESG programme, who might not have the resources and the wherewithal to do it. So there has to be some recognition that we need to bring them along. We don’t want to throw the baby out with the bathwater. But if we all work together, especially the big corporations, they can pass on knowledge and enable some of the suppliers to do these type of things, and then every year we’ll end up with better sources of information.”

There will be those suppliers who just do not want to comply or will want to comply on a timeframe and maybe they have to go, but Mr McAdoo says that is the same when we talk about risk in other areas. 

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