Engaging With SMEs Can Unlock Critical Scope 3 Emissions Data

Originally published on TriplePundit

For large companies intent on gathering the full scope of greenhouse gas emissions data to meet their climate goals, working together with suppliers is the only way to assess the crucial Scope 3 emissions. These are the indirect emissions produced both upstream and downstream across the value chain that account for 75 percent of companies’ GHG emissions on average.

While Scope 3 is hugely important for corporate climate risk disclosure, companies have the least control over these emissions compared to Scope 1, direct emissions from owned or controlled sources, and Scope 2, indirect emissions from the generation of purchased electricity.

That’s where collaboration comes into play — recognizing that every supplier, no matter the size, is part of the bigger picture. Small- to- medium-sized enterprises may seem less consequential than the large companies they supply, but collectively, they have a huge impact: SMEs make up 90 percent of businesses worldwide and affect the livelihoods of over 2 billion people. Together, they rack up emissions (63 percent of business emissions in Europe, for example), and the way they choose to conduct business impacts ecosystems and people’s quality of life in all corners of the world.

As larger businesses make commitments to track, disclose and reduce their environmental impacts — particularly their Scope 3 greenhouse gas emissions — they also have a responsibility to source from more sustainable suppliers and to work with their suppliers to change their practices if needed.

An approach that emphasizes collaboration and partnership — rather than top-down edicts and demands for data without context or time to prepare — will be far more successful in winning over most suppliers, says Andy Bastien, senior product manager for water and supplier transparency at the ESG and sustainability software company FigBytes.

“If you are asking someone for this information — for data on emissions you don’t control — you should make sure they understand that ask,” Bastien explains. “Your suppliers might be large organizations or small mom-and-pop shops. And if you want them to provide specific Scope 3 data, that will require a level of engagement and transparency for both company and supplier to work together to become better stewards of the climate together.”

Growing pressure for Scope 3 data

The demand for Scope 3 emissions data will not lessen any time soon. In fact, it is likely to increase, given changing regulatory requirements on how companies disclose their climate risks and a trend of standardized climate and environmental reporting.

That includes a forthcoming climate risk disclosure rule from the U.S. Securities and Exchange Commission (SEC) that, as TriplePundit has reported, few companies are prepared to meet. Regulatory scrutiny on company climate performance is part of a global trend: In the European Union, the EU Corporate Sustainability Reporting Directive entered into force this year, broadening the entities that need to report to some 50,000 companies, including SMEs.

On the standardization side, the International Sustainability Standards Board (ISSB) will soon require the companies using its reporting framework to disclose a range of information to assess climate risks and climate resilience. Its first two IFRS Sustainability Disclosure Standards are set to be released in June 2023 and become effective as of Jan. 1, 2024.

Not least, investors want to see Scope 3 emissions data as they try to understand the climate-related risks of their investments — and many have supported the push for the SEC disclosure rules.

Even if Scope 3 emissions are not included in the final SEC climate disclosure rule for large companies, other regulations — such as the proposed disclosure rule for U.S. federal contractors — underscore why companies need to raise their game on supplier relationships.

Best practices for engaging suppliers 

With fewer resources at their disposal, many SMEs are wondering how they can meet their customers’ demands for Scope 3 emissions data. While half of SMEs surveyed by the U.N.-backed SME Climate Hub calculate emissions and 60 percent have plans to reduce carbon impact, two-thirds are worried they don’t have the right skills and knowledge to tackle climate change.

Clearly, collaboration and partnership to overcome those types of barriers would be welcome. Bastien has found the most success with companies that understand their own house and what they are trying to achieve.

The companies that are successful at supplier data-gathering “look at it as an engagement policy, not an enforcement policy,” Bastien says. “Some large organizations may be able to command some leverage with their suppliers due to size alone, but most organizations don’t have that kind of leverage. The best approach is when companies look to adopt the role of an educator or enabler of their suppliers, rather than being prescriptive with top-down demands.”

Collaborative approaches that companies may want to consider include putting together a supplier code of conduct, if they don’t already have one, so suppliers have a clear understanding of expectations. Some organizations might use a survey to gauge the level of knowledge among their suppliers on Scope 3 and other climate risk information, or hold webinars or information sessions to raise awareness. Technology of course, serves a critical role too. Climate management software solutions help ease the burden of Scope 3 emissions data gathering for both companies and their suppliers.

Industry sectors can also look to join forces to support one another on meeting the increased demand for climate data. “There is power in numbers,” Bastien says.

Yet despite well-intentioned efforts, some suppliers may be reluctant to share their data, he acknowledges. Some organizations may see revealing their climate-related data as a negative rather than a positive, posing a risk that they might lose a contract if their performance is seen as lacking.

“That’s where engagement has to go hand-in-hand with transparency, so that suppliers can see this collaboration on improving climate and ESG performance as an asset rather than a liability,” Bastien explains.

No avoiding the downward pressure

For SMEs that may be hesitant to open up about their emissions to their customers, regulatory scrutiny on climate risk disclosure will soon make this everyone’s business.

“SMEs should understand that when these bigger players are mandated and regulated to report, it will put downward pressure on everyone to have their house in order,” Bastien says. “Whether you are a small supplier and don’t think you are affected by these regulations, if you are working for a bigger supplier, it is trickling down to you at the end of the day, and your own suppliers as well.”

Seeing the opportunity rather than the risk

Knowledge is power, and SMEs that fully understand their emissions performance can not only keep a positive relationship with their customers, but also pass that knowledge down to their own suppliers. In this way, Scope 3 emissions data becomes just another line in the accounting ledger, all along the value chain.

“Scope 3 GHG emissions are becoming part of the new reality, of every company’s bottom line, so putting yourself ahead of that risk and helping your suppliers reduce their risk is just a smart way to run your business,” Bastien says.

“The more we can ensure everyone takes the importance of doing their part to heart, the more we can get better data and have everyone across the value chain improve in terms of bringing down emissions,” he adds. “The entire chain gets a better lift when everyone does their part.”

And again, given the changing regulatory and reporting landscapes, there is no way around it. As Bastien puts it: “Achieving the desired outcome around Scope 3 is a matter of everyone raising their games together, because that is how we ultimately will be successful on this path to decarbonization.”

This article series is sponsored by FigBytes and produced by the TriplePundit editorial team.

Image credit: Tom Fisk/Pexels