ING’s Global Head of Sustainable Finance Jacomijn Vels tells us why companies need to get to grips with Scope 3 emissions and how they can get started.
Scope 3 emissions include everything from purchased products from suppliers to end-user emissions. Is the broadness of the category putting companies off?
It’s easy to be discouraged because getting to grips with assessing Scope 3 emissions can be quite overwhelming. Scope 3 emissions are indirect sources of carbon impact and can add up to significant quantities – often between 65% and 95% of companies’ total carbon impact. In order to manage their Scope 3 emissions, companies are dependent on other parties in their value chain, often small and medium-sized enterprises, to measure and report these emissions, which can make it difficult to control or influence them.
But even if it is difficult for a company to find out directly what this impact is in the value chain, there are third parties that can help. Parties such as the Science Based Targets initiative and the Carbon Disclosure Project, for instance, provide general guidance on reporting. The Greenhouse Gas Protocol has developed various free tools to calculate Scope 3, identifying 15 categories to track emissions.
Which companies will struggle the most with reducing Scope 3 emissions? Where are the ‘hotspots’?
This is hard to say. For companies in sectors with high Scope 3 emissions it will be harder as they really need to reinvent themselves. For companies where the bulk of their Scope 3 emissions is created by customers, getting the information will probably also be more difficult. It is easier and much more accepted to ask your suppliers difficult questions when you’re buying a product – it is not so accepted when you are selling a product to a consumer. A good example is the textile industry, where we know that 99% of textiles will end up on a dump.
How do we tackle this? And how can the industry contribute?
The EU is setting the standard for a strategy where products placed in the EU market are durable, repairable and recyclable and where the industry has sufficient capacity for recycling, minimising incineration and landfill.
Manufacturers, online retailers and distributors are increasingly legally required to compensate in different ways for the impact their products have, from production to end of life. Initiatives such as Extended Producer Responsibility (EPR) could help – it makes producers responsible for a product’s entire life cycle, from start to finish, including waste collection and treatment. France has introduced regulations which require both French and international companies selling products in France, including packaging, electronic equipment, batteries, furniture, and textiles, to comply with this regulation.
Following the EU Commission’s strategy for sustainable and circular textiles, this sector is starting initiatives to develop and finance the necessary recycling capacity, which is estimated to be at least €7 billion ump.. This is a good example of a scenario where regulation and industry can come together and create change.
How can companies work with their supply chain to reduce emissions? What do you think works better: incentives or exclusions? The carrot or the stick?
There are likely elements of both. Examples of the ‘stick’ are, of course, regulations and investor expectations – companies without transparent disclosure will face less investor appetite.
Incentives can partly be offered by the financial industry, which is essentially what we try to do with sustainable finance solutions – offering lower interest rates when a company complies with ambitious, relevant and material targets through KPIs. Generally, those with lower capital costs will have a competitive advantage.
There are many examples of KPI-linked options: For net zero, we need targets and monitoring of Scope 3. So we increasingly see Scope 3 targets being included in the targets on carbon emissions. In addition to targets on carbon emissions, we also see other targets, such as the percentage of recycled content in products, the percentage of recycled waste, number of products based on the circular design. The possibilities are vast.
An interesting observation from a regulatory perspective is the impact of the introduction of the Inflation Reduction Act in the US, where this regulation creates a pull for green investments. Not only is this a good illustration of a ‘carrot’ that aims to attract and persuade companies to invest in green technology, it has also led to a response by the EU in the form of the Net Zero Industry Act to ensure that the EU also remains attractive for international companies for such technology investments.
Is ING pricing in climate risk to its loan portfolio? If so, how?
There are various workstreams at ING that are working towards an integrated approach to pricing climate risk into our loan portfolio. Identifying climate risk and translating this in our risk appetite is of course an important element of steering ING’s portfolio.
Apart from measuring the downside, we also want to develop tools to work towards pricing incentives for transactions that help mitigate climate risks. This starts with knowing where your clients are on their path to net zero. For clients in the bank’s Terra approach, its in-house methodology for decarbonising the most carbon-intensive parts of its loan book, ING is working on such a tool. By the end of this year, all clients in the Terra sectors will have an alignment score.
Companies that do not transition will have to face higher capital costs – not only by missing out on the pricing incentive of our sustainable products but also as a result of the risk frameworks that financial institutions are building.
What is clear though is that not accounting for the cost of carbon emissions in the price of goods and services is a practice that should not go on for much longer.
Expert view: How to start tackling Scope 3 emissions
Use the tools and standards that are out there
Many are free. A good start would be to assess how material your Scope 3 impact is compared with your Scope 1 and Scope 2 emissions. Even if you do not have full data, the Science-Based Targets initiative and GHG Protocol have developed rigorous target-setting and measurement schemes that you can share with suppliers and customers.
Break up your Scope 3 emissions into smaller pieces
Then, start measuring the ones you can identify. Find out what your stakeholders in the value chain are doing, both upstream and downstream. It is difficult to know how far to investigate down or up the value chain, so start by trying to identify the biggest contributors to Scope 3 emissions. Focus on selecting the most material categories and set an ambitious goal for reducing emissions in each one.
Start engaging in your industry
You will probably find companies that are facing similar challenges. This will help you to find willing collaborators.
Society is transitioning to a low-carbon economy. So are our clients,
and so is ING. We finance a lot of sustainable activities, but we still finance more that’s not. See how we’re progressing on ing.com/climate.