What will really make a difference on Scope 3 emissions? Consultancy Guidehouse shares insights into how early-mover corporates are decarbonising value chains, and how lenders are coming together to encourage disclosures. If they set the example, these front runners can kickstart a snowball effect.
Reducing Scope 3 emissions is not easy, but some forward-thinking companies and financial institutions are making real progress. They are not only leading on carbon disclosure advocacy and transition finance, they are also rethinking their business models to fit into a net zero future. This dual approach to Scope 3 reduction enables these early movers to kickstart decarbonisation while defining and refining their strategies.
The financial sector’s plans for net zero are all about reducing Scope 3 emissions, because direct emissions from their operations are minimal. Whether they are private or public, banks and investment firms are accountable for Category 15 Scope 3 emissions, which are generated by the corporations they lend to or invest in.
The financial industry is under pressure to take action against climate change,” says Angelica Afanador, director of sustainable finance at global consultancy firm Guidehouse.
This has led to a regulatory push for banks and asset managers to be more transparent and accountable
Early adopters are boosting regulatory action on carbon disclosure
In 2015, following the Paris Agreement, 14 Dutch financial institutions set up the Partnership for Carbon Accounting Financials (PCAF) to increase disclosure of
Category 15 emissions and guide financial institutions towards net zero. PCAF expanded globally in 2019 and helped to implement the Sustainable Finance Disclosure Regulation (SFDR) legislation, which makes greenhouse gas accounting mandatory for financial institutions in Europe2. Now, PCAF comprises nearly 400 signatories, says Afanador, who is also the PCAF secretariat’s executive director.
On the corporate side, forward-looking brands can actively support their suppliers in tackling their own emissions by joining forces for greater impact, according to Jeroen Scheepmaker, director of sustainable supply chains at Guidehouse.
Brands can work together to bring their common suppliers to the table in order to have discussions and training sessions, and that’s beneficial for the whole sector,” he says.
Companies should train their suppliers in carbon accounting, understanding the data and setting up a strategy for reduction
Frameworks such as the Supplier Leadership on Climate Transition (Supplier LOCT), for instance, provide workshops on emissions tracking, science-based target setting and carbon abatement and disclosure.
By setting an example, early adopters can make a big difference when it comes to Scope 3 reduction. “Those leading institutions, in the corporate or the financial world, are the ones that are highly visible to regulators,” says Afanador. “They are the shapers, and then you see the others start to follow. It creates a snowball effect.”
Scheepmaker agrees. “In a sense, the leading companies are ahead of the game,” he says. “It’s the regulation that needs to catch up.”
Jeroen Scheepmaker, director of sustainable supply chains and Angelica Afanador, director of sustainable finance at global consultancy firm Guidehouse
Companies need strong leadership and stakeholder engagement
How can brands emulate the leading companies? Scheepmaker recommends they start small – by focusing on Scope 3 hotspots. “Start with a granular approach and focus on where the real carbon impacts are, because otherwise you will be calculating for three or four years before you’re able to start implementing,” he says.
You should work on the data, but also on concrete actions, because this will help you to secure engagement from the internal stakeholders you need in order to make things happen.
This means companies should complement a data-based, bottom-up approach with a strong leadership push – a strategy Scheepmaker describes as “top-down meets bottom-up somewhere in the middle”. He adds: “It’s important to have both conversations at the top and employee engagement around these targets.”
Financial firms are working with corporates on their net zero transition
According to Afanador, financiers need to actively guide investees and clients in their net zero transition, instead of applying the sector-wide exclusions that are often the last resort in banks’ climate policies. But she says that financial firms will need to tread carefully when funding companies operating in industries that are currently considered unsustainable. “Actions can really quickly be criticised as greenwashing if you don't have a robust methodology in place to measure the impact of transition finance,” she says.
Moreover, explicit corporate demand can potentially lead to the creation of new transition-focused financial instruments. “Work with a bank that has sector specialists who can actually transfer knowledge as well,” says Afanador. “Then you suddenly start to create momentum.”
Working with an apparel brand, Guidehouse performed energy and technical audits of the firm’s supply chain partners. The brand wanted to secure lower interest rates for its suppliers’ decarbonisation efforts by acting as a financial guarantor. “We will do audits at those suppliers and help them with all the questions they have,” says Scheepmaker. “The financial component is included here to work on deep decarbonisation.”
But reducing emissions is not the end game: companies and the institutions that finance them need to reflect on how their business models should evolve to avoid climate risks.
“Go to the drawing board and create a sketch of your organisation – how it should look,” says Scheepmaker.
Rethinking your licence to operate is more relevant than just having a five-year trajectory for Scope 3 emissions. In the end, it's all about creating a business that’s sustainable and fit for a net-zero future.
- Scope 3 represents the bulk of financial services companies’ emissions, through the Category 15 emissions that come from their clients’ and investees’ operations.
- Actions of early movers in carbon reduction are incentivising industry peers and prompting regulatory action.
- A data-driven, bottom-up approach needs to meet a top-down push for optimal decarbonisation.
- Strong demand from companies can lead to the creation of new transition-finance products, but a robust methodology to measure the impact of transition finance is needed to avoid greenwashing.
The views and opinions expressed in this article are those of the interviewees and do not necessarily reflect the views or opinions of ING.
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