The evolving sustainability landscape

Driving efforts around supply chains and scope 3 emissions

Sustainability continues to rise up the agenda for companies for a number of reasons. Global regulations, particularly in climate and sustainability, are driving momentum. In Europe, the Corporate Sustainability Reporting Directive (CSRD) will require comprehensive reporting across environmental, social and governance (ESG) aspects, influencing companies’ strategies.

Emily Farrimond suggested that initially, businesses focused on direct emissions, scopes 1 and 2, but are now shifting attention to indirect emissions, scope 3, which can comprise up to 80% of total emissions for many organisations. Given its significance, addressing scope 3 is pivotal for any net-zero target or strategy.

Regulation is a key driving force. Companies are increasingly adopting science-based targets that require coverage of their scope 3 emissions if they are material. In fact, over a third of the total market capitalisation of companies in the world – measured on their total market value – has committed to setting such targets through the Science Based Targets initiative (SBTi).

Richard Tarboton added that businesses have made tremendous progress, with more and more companies signing up to set targets and communicate the information that’s required by their investors, stakeholders and supply chains about what their emissions are and how they are improving on them over time.

Encarna Mateos noted that the main problem that Sacyr face in advancing scope 3, is often the lack of experience throughout the value chain, resulting in a lack of transparency in the information reported.

Measuring scope 3 emissions

Scope 3 encompasses all emissions from a company’s suppliers and customers, including those generated in the production and use of goods and services throughout the supply chain. Richard Tarboton stated that if you operate an agricultural supply chain business selling food, all emissions stemming from farming activities, including those from tractors, machinery, soil management and crop cultivation, contribute to your scope 3 emissions. You can imagine that it gets quite complicated.

The second key issue is engagement and control. While you have direct control over enhancing energy efficiency within your own operations through investments and installations, influencing emissions within the supply chain is more indirect. Emily Farrimond suggests that companies can exert some control through the contracts that are awarded, requiring suppliers to meet specific standards. However, these suppliers have their own supply chains, contributing indirectly to your scope 3 emissions.

Integrating sustainability-linked financing into sustainability strategies

The essence of sustainability-linked financing lies in its role as a facilitative tool for engaging organisations on sustainability. Financiers use it to assess businesses against sustainable goals before lending. However, corporates must first establish their sustainability objectives, tailored to their specific sector and industry. This involves selecting relevant KPIs, such as emissions for energy companies or social metrics for textile factories, for example, ensuring a comprehensive approach across the entire supply chain.

If the suppliers meet these KPIs, the buyer may offer pricing incentives or provide access to supply chain financing options. This illustrates the various methods by which large organisations incentivise and extend financing to their deep-tier supply chains. It’s also crucial for these organisations to support their suppliers in adhering to the set KPIs.

Encarna Mateos concludes by mentioning that another aspect of innovation revolves around digitalisation and the importance of data capture. It’s incredibly important to establish standards that enable everyone to evaluate sustainable targets consistently. When it comes to assessing KPIs, companies typically appoint an ESG-focused fintech to assign ESG scores. However, these entities often utilise their own methodologies, albeit based on common principles, leading to variations in assessment standards.

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