Article #2 from Heartland's Industry 5.0 Series - Scope 3 Emissions

Scope 3 Emissions – The Good, The Bad, and The Ripple Effect

From the Heartland Series based on the book – Industry 5.0

The Pressure to Report Scope 3 Emissions

Last week we touched on the new SEC rules for reporting emissions and as we covered, the new rules only apply to Scope 1 & 2 emissions. But looming in the not to distant future, those arduous Scope 3 emissions will be in play soon. Last year we heard Emilio Tenuta, Chief Sustainability Officer at Ecolab, speak at a sustainability conference and he succinctly captured the challenge when he described Scope 3 Emissions simply as “hard – very hard!” This sentiment resonated with everyone in the room, many of whom were managing sustainability within their company and had embarked on some type of Scope 3 journey of their own.

The push to report these challenging standards comes from various places, particularly pressure from environmentalists and government agencies (like the SEC). For decades, conservationists have highlighted the negative effects of human activity on the planet. Our advancements over the last century have significantly exacerbated these effects, outpacing the Earth’s natural defenses. According to the Global Footprint Network, we are using resources at a pace equal to the output of 1.7 Earths! Clearly indicating that this is not sustainable, and pointing out the need for urgent action.

Corporate Responsibility and SEC Regulations

Corporate responsibility is increasingly driven by speculation, competition, and regulation, and the SEC’s rules require public companies to report on their just their carbon emissions, but also their climate-related risks, other greenhouse gas emissions (methane, nitrous oxide, fluorinated gasses), as well as detailed “net-zero” transition plans. This move will pressure companies to prioritize sustainability, driven by regulatory requirements and investor expectations favoring environmentally responsible businesses.

The SEC plan focuses on three main areas:

  1. Material Climate Impacts: Reporting on physical risks like fires, floods, and other weather-related events, as well as market, technology, and regulatory changes.
  2. Greenhouse Gas Emissions: Initially focusing on Scope 1 and 2 emissions, with Scope 3 emissions reporting expected to be mandated by 2024 or 2025.
  3. Targets and Transition Plans: Companies must disclose their emissions reduction targets, energy usage, nature conservation plans, and low-carbon product revenues, along with their strategies for achieving these targets.

So, whether you’re a large corporate entity or one of many suppliers in the chain, you will need to be involved in the management of Scope 3 emissions.

Beyond Public Companies: The Ripple Effect

The key issue that separates Scope 3 from the first two is that cooperation will be paramount up and down the supply chain. For a large organization, that could be hundreds of smaller firms that lie in the supply chain. Those smaller firms will also have to start collecting carbon emission data – locally and within their supply chain(s), whether or not they are publicly traded or not. This is what we refer to as the “Scope 3 Ripple Effect.”

Publicly traded firms will increasingly require their suppliers to report their carbon footprint impacts, including those of products, raw materials, and associated activities. This trickle-down effect means that even privately held companies and smaller suppliers will need to track and report their emissions to remain competitive and maintain business relationships with larger firms.

The implications of the SEC’s Scope 3 reporting requirement extend far beyond publicly traded companies themselves. In today’s interconnected business landscape, companies of all sizes and ownership structures are inextricably linked through complex supply chains and partnerships. As a result, the ripple effect of this regulation will be felt across industries and sectors. Larger corporations, driven by regulatory compliance and a growing emphasis on sustainability, will inevitably demand transparency from their suppliers and partners. This demand for emissions data will cascade down the supply chain, creating a domino effect that will compel even the smallest private companies to meticulously track and disclose their carbon footprints.

Companies that delay emissions reporting may find themselves at a significant competitive disadvantage, as larger firms increasingly prioritize sustainable and responsible business practices. In essence, the Scope 3 reporting requirement is a catalyst for a fundamental shift in corporate accountability and transparency. For example, a small business that supplies components to a large, publicly traded manufacturer will likely be asked to provide detailed emissions data. This is because the manufacturer needs to include the emissions associated with these components in its Scope 3 reporting. As a result, sustainability practices and emissions reporting are becoming essential for companies of all sizes, not just those directly regulated by the SEC.

Managing Scope 3 Emissions

While Scopes 1 and 2 are direct and easier to measure, Scope 3 emissions encompass all indirect emissions across a company’s value chain. That means that managing Scope 3 emissions involves addressing the emissions from a business’s partners, especially raw materials suppliers. This requires finding ways to reduce environmental impact through responsible sourcing, using bio-based or carbon-neutral materials, and adopting local, circular supply chains.

Measuring Scope 3 emissions is challenging due to this new reliance on data from suppliers and in turn, their supplier’s suppliers! The complexity increases with each level of the supply chain, leading to potential inaccuracies and double counting. The SEC recognizes these challenges and has allowed additional time to refine the reporting requirements for Scope 3 emissions.

A typical scenario looks like this: A large brand buys components from tier 1 suppliers, they buy from tier 2’s and tier 2s buy from tier 3 raw materials suppliers. This is why we believe that decarbonizing materials and feedstocks has so much value. If you can start the effort at the point of materials, then the “Ripple Effect” can work in everyone’s (up and down the supply chain) favor!

Starting at Square 1 – Implementing Sustainable Materials in Manufacturing

One promising avenue for reducing Scope 3 emissions is the adoption of new, more sustainable materials, such as natural fiber-filled plastics. The reduction in emissions begins at the raw materials processing stage and benefits cascade throughout the supply chain:

  1. Reduced Carbon Footprint: Natural fibers such as industrial hemp, flax, and cotton have lower carbon footprints compared to traditional plastics. Using these fibers as additives in plastics can significantly reduce the overall emissions associated with production.
  2. Sustainability: Natural fiber-filled plastics are often biodegradable and can be sourced from renewable agricultural resources, making them a sustainable alternative to conventional plastics.
  3. Improved Performance: These materials can enhance the properties of plastics, such as strength and durability, while reducing weight and cost.

These new materials can give even the smallest plastics supplier, formulator, or compounder significant traction in the efforts to reduce carbon footprints. Along with the ability to report on the reduction of emissions, as many of the material suppliers are justifying the impact of the materials by way of LCA‘s that are conducted by third party experts.

Incorporating these new materials into manufacturing processes requires a strategic approach. Companies need to evaluate the entire lifecycle of these materials, from sourcing to end-of-life disposal. This involves:

  • Sourcing Responsibly: Ensuring that the natural fibers used are sustainably grown and harvested.
  • Optimizing Manufacturing Processes: Adjusting production methods to accommodate new materials while maintaining product quality and performance.
  • Collaborating with Suppliers: Working closely with suppliers to gather accurate emissions data and promote sustainable practices throughout the supply chain.

Where Do We Go from Here?

Beyond the U.S., other regions are also advancing sustainability reporting measures. The EU, Japan, and Hong Kong have introduced similar initiatives. The Task Force on Financial Disclosures’ voluntary guidelines, adopted by over 2600 companies globally, demonstrates the widespread commitment to sustainability.

This global movement towards sustainability reporting highlights the increasing importance of transparency and accountability in corporate environmental practices. Companies that embrace these changes will be better positioned to meet regulatory requirements, and satisfy investor expectations.

The shift towards reporting and managing Scope 3 emissions is a significant step in the global effort to mitigate climate change. While very challenging, it presents an opportunity for all businesses to innovate and lead in sustainability. The adoption of new materials plays a crucial role in this transition, offering a pathway to reduce emissions and enhance environmental stewardship.

Even those not directly under SEC regulation will find it necessary to align with these standards, driven by the interconnected nature of supply chains and the overarching demand for corporate responsibility. This collaborative approach is essential for making meaningful progress in reducing global emissions and ensuring a more sustainable future.

It can seem like a daunting task, and there are many sustainability managers feeling the pressure to meet those looming objectives and mandates. The key is partnership, and we see a landscape where companies will join forces to address the supply-side of Scope 3 Emissions.

Want to learn more about how we can help you on your carbon footprint journey? Contact us here –