1. Scope 3 Carbon Emissions
The GHG (greenhouse gas) Protocol Corporate Standard classifies a company’s emissions into three scopes.
- Scope 1 emissions are emissions that are created directly by the company.
- Scope 2 emissions are indirect emissions from the generation of purchased energy.
- Scope 3 emissions are indirect emissions found in upstream and downstream sources in a company’s supply chain. Examples include business travel, purchased goods and services, employee commutes and waste disposal.
Scope 3 emissions are often overlooked when measuring carbon footprint as they generally fall outside a company’s direct control and are hard to account for. However, it is important for companies to track their scope 3 emissions as it is the only way to achieve net zero goals.
With the recent upsurge in stakeholders demanding immediate action on climate emergencies, the onus is being put on companies to take responsibility for their scope 3 emissions.
Having a full-circle understanding of carbon footprint gives companies opportunities and benefits such as:
- Identifying emission hotspots and reducing energy use and operating costs.
- Getting ahead of ESG legislation that is becoming mandatory as goverments around the world set net zero deadlines.
- Enhancing corporate reputation and trust amongst stakeholders through public reporting.
2. Visibility and Provenance
Most supply chains can be broken up into three tiers:
- Tier 1 suppliers are partners that companies directly do business with such as manufacturing and production partners.
- Tier 2 suppliers are the sources where tier 1 suppliers get their materials.
- Tier 3 suppliers typically produce the raw materials that are used by tier 2 suppliers to manufacture products.
The coronavirus pandemic showed us that most companies have limited visibility into their tier 2 and 3 suppliers. It is impossible to make claims about the ethical, sustainable or quality status of a supply chain without knowing where and how the raw materials for products are sourced.
Using an end-to-end traceability solution allows decision makers to consolidate and visualise data from multiple supplier sources. It also allows businesses to see that their materials are coming from known and approved sources.
Businesses that do not have visibility into all tiers of their supply chain risk being exposed to ESG violations such as environmental pollution, workplace health and safety accidents, corruption, modern slavery and child labour.
3. The S in ESG
Positive work cultures have long been correlated with less absenteeism, productive employees and better economic performance. However, in the wake of a burgeoning ESG movement, investors are beginning to probe more deeply into social governance in workplaces. Jeff Hales, chair of the Standards Board at SASB, said stakeholders are beginning to cast a wider net when assessing social governance issues.
As well as looking at the treatment of workers, there has been an increase in requests for companies to voluntarily disclose the racial and gender breakdown of their workforce in their ESG reporting, particularly in board representation and company policy inclusion. The killing of unarmed Black Americans earlier in 2021 has also spurred increased demands for companies to account for how they are taking action on their impact on minorities and systematic racism.
4. Resource Use
The World Health Organisation estimates that half of the world’s population will be living in water-stressed areas by 2025. Despite a sustained drought period and cataclysmic bushfires in Australia, a 2020 report found that only 36% of Australian companies have a water efficiency policy, and just 11% have set specific targets. While there is a lot of noise around carbon emissions in the ESG sphere water is just as important to investors. This has manifested in numerous water dedicated indexes being set up.
Thomas Schumann Capital developed the TSC U.S. Water Security Index which is comprised of 550 of the US’ largest companies. The indexes automatically exclude companies in gambling, tobacco and defence arenas along with those with the worst combined ESG and UN sustainable development goal ratings. The TSC U.S. Water Security Index generated a return of 116.5% between its creation in 2015 and August 2021, compared with a 104% gain garnered by S&P 500 Index in the same period.
US Invesco Water Resources ETF represents $1.5 billion and invests in companies that conserve and purify water for industry and residences. The fund rose at an annual rate of 17.8% in the past five years, compared with a 16.3% increase of the S&P 500.
Investor behaviour has made it clear that companies need to address all facets of their resource use in their ESG reporting, especially those that are finite.
5. Waste Management
There has been increased scrutiny on recyclability claims in 2021 with many environmental groups holding companies accountable through increased reporting, shareholder resolutions and lawsuits.
A 2021 report from the Harvard Law School Forum on Corporate Governance cited the increase in shareholder proposals. At the end of the 2020 proxy season, 90% of S&P 500 companies had published an ESG report, up from 86% in 2019.
In the US, environmental groups have filed several lawsuits in 2021 against large brands including Coca-Cola, Walmart and TerraCycle Inc for false claims around the recyclability of their packaging. This has prompted the Federal Trade Commission (FTC) to reconsider its Guides for the Use of Environmental Marketing Claims – otherwise known as Green Guides. The agency will review the regulations in 2022. This move coincides with action taken in Europe where Sustainable Financial Disclosure Regulation has been in place since March this year.
Omitting waste management policy from ESG reporting is also a lost economic opportunity. Currently, Australia is losing out on $419 million by not recycling PET and HDPE plastics and $115 million by not recycling paper. By 2036 $2.5 billion in economic opportunity could be lost by not recycling lithium.
A starting point
If comprehensive ESG reporting is a focus for your business, starting with the right technology is key. Blockhead Technologies has a suite of products that help companies track, action and report on their ESG targets.
Contact our friendly team for a free demo today.