In the latest round of annual reports, there has been a noticeable increase of climate-related disclosures. According to one fund manager, who shared their analysis with us, out of the 216 ASX companies reviewed, 60% have disclosed their emissions data and 48% have set an emissions target (an increase from 12% in 2019). However, many of these companies still do not break down their carbon inventory as per scope 1, 2 and 3 of the Greenhouse Gas Protocol.
Scope 1 and 2 refer to emissions that are, more or less, within a company’s control. While scope 1 captures emissions arising from the production of a good or service, scope 2 relates to the electricity a company purchases. However, a company’s carbon inventory isn’t complete until it tallies up all the emissions throughout its entire value chain (scope 3).
Accounting for scope 3 is no easy feat. It covers 15 ‘categories’ of activities ranging from sourcing of materials (suppliers) to how materials are shipped and then distributed to market. It also accounts for how the product is used by end-market consumers – for example, shampoo used in hot showers or emissions generated by gas when consumers burn it in their factories and homes – all of which are outside a company’s control.
So, while companies can be fairly accurate about the emissions they directly produce, that accuracy drops rapidly when they have to account for the ‘indirect’ emissions from their value chain. Furthermore, if suppliers do not report on their emissions, this adds a further challenge. For this reason, companies tend to focus more on reporting scope 1 and 2. Conversely, as more companies face pressure to set a net zero target, it will create a knock-on effect for suppliers to account for their emissions.
However, for a company to set a net zero target, it needs to include indirect emissions. One report quoted that around 85-90% of most companies’ emissions fall under scope 3. This rate is even higher for fossil fuel miners. According to the Australasian Centre for Corporate Responsibility (ACCR), BHP’s scope 3 emissions are 35 times those of operations, while for gas producers Santos and Woodside the figure is four times.
Putting the intricacies of carbon accounting aside, a company’s decarbonisation strategy is more telling. Priority should be placed in pursuing carbon reduction alternatives within the operation and value chain before resorting to carbon offsetting schemes. This can include investing in high efficiency equipment and streamlined logistics, sourcing products with recycled content and that are highly recyclable, adopting renewable energy sources or eliminating and reducing number of chemicals used in manufacturing – all of which increase efficiency and lower operating costs.
The ACCR cited examples of Santos and Woodside Petroleum, who have committed to reducing operational emissions by 26-30% and 30% by 2030 respectively through a combination of carbon offsets and carbon storage. Meanwhile, the group is planning to significantly increase gas production over the same timeframe, which is contrary to the pursuit of carbon reduction. Developing a meaningful strategy, stems from identifying the most carbon intensive activities within the business. This can only be revealed through a carbon inventory exercise.