Two experts call on companies to calculate and report ‘scope 3’ emissions along their value chain as soon as possible.
We recently published a review of how China’s major firms are disclosing greenhouse gas emissions. Here we summarise our findings and offer recommendations to companies.
We found that nearly 80% of major firms are not yet disclosing any scope 3 emissions, meaning indirect emissions along their value chain. Our advice for them includes reporting such emissions as well as the calculation methodology and data sources they use. They should set emissions targets alongside clear action plans for achieving them. And they should work with companies across their supply chain to ensure it becomes zero-carbon.
A pressing issue
In the first nine months of 2024, the global average surface air temperature was 1.54C above the pre-industrial level. The goal of the Paris Agreement is to keep the long-term average below 1.5C. Current national policies worldwide could see a rise of 3.1C by the end of the century.
As listed firms may account for over 40% of global greenhouse gas emissions, their decarbonisation is a key part of climate governance. Emissions in the value chains of those firms – known as scope 3 emissions – have become an obstacle to goal-setting and disclosures.
What are scope 1, 2 and 3 emissions?
Efforts by Chinese firms in this regard are only just starting to get attention. Less than a quarter of the 667 major Chinese companies that we sampled in our recent review disclosed any scope 3 emissions in 2024.
From in-house operations to the value chain
At Carbon Mind, we selected all 667 companies from the CSI 300 Index, H shares, and the Hang Seng Composite LargeCap Index (HSLI), representing the largest and most influential listed companies in China. Our research found that 84% of those firms were disclosing scope 1 and 2 emissions, yet only 22% were revealing scope 3 emissions. Firms on the HSLI were doing better than average, with a disclosure rate of 51%, compared to 21% on the CSI 300 Index. This is due in part to differences in the sustainability disclosure rules across the exchanges.
Globally, 47% of listed companies disclosed at least some upstream scope 3 emissions in the first eight months of 2024, accompanied by 28% for downstream, according to research by Morgan Stanley Capital International. So, China’s listed firms are lagging badly on climate disclosure and need to work hard to catch up.
In 2023, the International Sustainability Standards Board issued its first International Financial Reporting Standards, IFRS S1 and IFRS S2. These made clear that firms must disclose sustainability-related risks and opportunities, and related information. This includes reporting on corporate emissions, such as scope 3. That provided firms around the world with a clear framework, putting carbon accounting and reporting on a more standardised footing.
For Chinese firms, 2024 saw a shift from voluntary to mandatory sustainability disclosures: in April, the three major stock exchanges – Shanghai, Shenzhen and Beijing – published guidance on sustainability reporting, encouraging firms to make scope 3 disclosures.
At the same time, the Hong Kong Stock Exchange toughened up its mandatory requirements, setting out a staged implementation of the ISSB rules, meaning scope 3 disclosures would become required for all HSLI firms from 2026. Then, on 10 December, the Hong Kong government published its Roadmap on Sustainability Disclosure, requiring publicly accountable entities – defined as listed companies and some financial institutions – to adopt ISSB standards. By 2028, all large, listed companies, and non-listed financial institutions with significant operations in Hong Kong, must be fully implementing ISSB standards.
From accounting to disclosure to setting goals
Companies are starting to work on making scope 3 disclosures, but many challenges lie ahead.
According to our sample, about 80% of China’s major listed firms are not yet making scope 3 disclosures. That figure may have been even lower if our research had included listed companies of all sizes.
Of those making scope 3 disclosures, many are still doing so selectively; disclosing only the emissions that are easier to calculate, such as those arising from their employees’ commutes or business travel. Other factors, with greater impact on the company’s carbon footprint, are missed out.
For example, purchased products and services are a major source of scope 3 emissions for most firms. But only 7% of the firms we looked at disclosed this data. Such data can be calculated by the “supplier-specific” method, which means collecting data from the suppliers. But it can be hard to obtain the data this way. Companies often prefer to use “spend-based” or “average-data” methods, which rely on industry-average “emission factors”. There are concerns about the accuracy of these two methods.
What are spend-based and average-data methods? And emission factors?
Moreover, of the 102 financial institutions we looked at, less than 7% disclosed emissions from their investment and financing portfolios.
A more serious challenge is a failure to disclose accounting methodologies. Most firms do not say which methodology they apply, or the emission factors or data sources used. That means a serious lack of reliability and comparability. If firms use different definitions, methodologies and sources, comparing data across companies becomes harder. There is also a lack of transparency when methodologies are adjusted, making it hard to track trends across time.
Even when disclosures are made, there is more work to do. The real challenge is setting tough goals and taking effective action to cut emissions and achieve long-term climate targets. We found that less than 5% of firms have set targets for scope 3 emissions. Only 3% set that target at net zero. There is much work to be done on accounting, disclosure and then target-setting.
Building a net-zero value chain
Firms that have taken the lead on scope 3 reporting often turn out to be more competitive. Transparency and disclosures remove barriers to financing, reduce operational risks, improve corporate reputations and send positive signals to stakeholders. To avoid future regulatory risks and improve competitiveness on the global market, Chinese firms should recognise the importance of scope 3 disclosures and get to work as soon as possible.
Based on the findings of our review, we make the following recommendations.
First, they should adopt common international and domestic accounting standards, such as the Greenhouse Gas Protocol, to ensure data is accurate, transparent and comparable.
Second, once disclosures are made, companies should identity and prioritise those sources of emissions that have the biggest impact and the greatest potential for change. This requires firms not just to focus on numbers going up and down. They need to explain if they are using a spend-based, average-data or supplier-specific method. They need to explain where emission factors are coming from, and which emissions sources are not yet covered and why. There should also be a gradual improvement in scope 3 calculations. For example, shifting from spend-based methods to physical data and supplier data for major emissions sources.
More importantly, companies should set emission targets and make those concrete, with practical and achievable timetables. They should be benchmarked against firms that lead on emissions disclosures. Clear medium- and long-term targets and action plans should be established, with progress regularly tracked and disclosed.
Finally, companies cannot cut their scope 3 emissions alone. Cooperation is necessary to build stronger zero-carbon value chains. Companies need to actively work with all parts of their supply chain, promoting and empowering suppliers to calculate their emissions, to boost accuracy of the company’s own scope 3 data.
When emissions hotspots are identified anywhere along the value chain, companies should share knowledge and cooperate on innovation with stakeholders to tackle those. This will promote the development and application of new green technology and solutions, accelerating the low-carbon transition of the entire system.
Đăng nhận xét