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Scope 3 Promises to Create Early Risk for Supply Chain Companies

By August 3, 2023September 20th, 2023No Comments

Supply chain companies face a new and often unrecognized challenge in the shape of the EU’s Corporate Sustainability Reporting Directive (CSRD) in 2024 and the SEC Climate Disclosure Ruling in 2025. The CSRD, for example, will cover around 50,000 companies in the EU, including around 3,200 US companies with major operations there.

The CSRD’s impact multiplies because it mandates companies not only to report their own greenhouse gas (GHG) emissions (Scope 1 and 2) but also those within their supply chains, known as Scope 3 emissions. Estimates suggest that roughly 70-80% of GHG emissions fall under Scope 3.

Consequently, the EU legislation’s reach extends far beyond the initial 50,000 reporting companies.

The multiplier effect

There is provision within the calculation methods laid out by the Greenhouse Gas Protocol to use proxies, averages and secondary sources to report Scope 3 emissions, while using the most specific available and feasible data. But a rough estimate, assuming each of these 3,200 SMEs has six or seven unique suppliers, suggests that over 20,000 US companies may need to disclose ESG data to their CSRD-reporting customers, and about the same number again in Canada, the UK, and Australia.

This scenario mirrors what happened with the EU’s data protection regulation, GDPR, which hit US companies that had a significant presence in Europe and therefore the ecosystems of those US companies.

Risk and reward

​​Scope 3 not only represents the largest pool of emission reduction opportunities, it is also where large downstream companies can reduce their carbon footprint at marginal cost – the supply chain is doing the work. Chief Procurement Officers (CPOs) and their teams are ramping up efforts to seize this opportunity.

For supply chain companies, the question is not whether to respond to  CSRD, but how quickly to do so.

They must decide whether it is an opportunity to gain market share or an effort to defer to cut costs in the short term. Deferring compliance may minimize near-term costs but expose them to financial risk as customers may favor companies demonstrating greater Scope 3 progress, potentially resulting in a loss of market share.

Conversely, acting promptly allows companies to invest while monitoring affordability, managing margin and operational risk and aiming to offset costs with gains in market share and stakeholder appeal.

The illustrative numbers provided above show the impact of CSRD, and the SEC regulation in 2025 will also exert influence.

The disclosure of sustainability data is becoming critical for companies in the supply chain. With the 2024 regulations looming, immediate action is imperative.

What next?

Here is our advice for companies to position themselves:

1 Get the organization up to speed: ensure all understand the regulations, the reporting standards, and response options.

2 Assess, and develop a plan: complete a simple qualitative assessment of current position and create a strategy to report sustainability performance, including selecting the appropriate reporting framework, setting targets, identifying risks, engaging with stakeholders, and establishing a timetable to implement.

3 Gather data and intelligence: collect data on your environmental, social, and governance performance and start to gather intelligence on potential future impacts. This includes data on your emissions, waste management, labor practices, and external factors, such as the diverse political, economic, and stakeholder forces that affect sustainability.

Sustainability requirements will become the norm for many in 2024, and for most in 2025. Sure, these are externally driven requirements at a time of economic uncertainty and where the politics of sustainability and ESG are polarizing. But still they will become imperatives and companies that act now have a better chance of shaping their own destiny.

If you’d like to set up a free 30-minute consultation to get started today, don’t hesitate to contact us