Why measuring the ‘scope’ of carbon emissions is tricky

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When a company commits to reducing its carbon emissions, how important is that? It depends on what is counted. An oil company’s direct emissions – those from its trucks, drills and facilities – are only a small fraction of the CO2 emitted when the fuel it sells is burned. McDonald’s Corp. to buy solar power for its offices can be considered alongside the much larger carbon impact of its suppliers raising cattle and the franchises selling its burgers. As more and more investors take environmental factors into account, what used to be a technical debate is becoming increasingly important, as a question of “scope”.

1. What does “scope” mean?

It’s a method of accounting for a company’s impact on climate change, using three categories to account for the different ways companies can pollute the atmosphere. Under what is known as the Greenhouse Gas Protocol, emissions are categorized as Scope 1, 2 or 3. Scope 1 covers direct emissions from sources owned or controlled by a company , such as a fleet of cars or a power plant. Scope 2 covers emissions from the production of energy that the company purchases, such as electricity. Scope 3 is everything else related to the business: emissions produced by the entire value chain, including suppliers and customers. This three-tiered approach was born out of a partnership between the World Resources Institute, a global non-profit environmental organization, and the World Business Council for Sustainable Development, an association of more than 200 companies.

2. Why break it down this way?

A company like McDonald’s that has large scope 3 emissions and small scope 1 and 2 numbers will need to use different tools in their climate toolkit than, say, an electric utility. McDonald’s said it is focused on eliminating all resulting deforestation from its global supply chain by 2030 and working to use more sustainable materials in packaging. Since she usually doesn’t own the land or livestock to make her burgers, she has to work with suppliers to make the switch. Many companies that make consumer products, such as Procter & Gamble Co. and Coca-Cola Co., or automakers like Ford Motor Co., will have a big 3-digit reach. When pollution reduction plans are deployed, the categories help shareholders understand what is really promised and how ambitious it is. Disclosure can help the market reward or pressure companies based on their performance.

3. How is this approach implemented?

The concept gained momentum after the 2015 Paris Agreement on climate change, when countries came together to set emission reduction targets to slow global warming. The Task Force on Climate-Related Financial Disclosures, a financial industry-led group, was created the same year as the Paris Agreement to encourage companies to make details of their environmental risks public. It recommends that investors and managers disclose Scope 1 and Scope 2 emissions from their portfolios, and Scope 3 “if applicable”. (The task force was founded and is chaired by Michael R. Bloomberg, majority owner of Bloomberg LP, the parent company of Bloomberg News.) The scoping framework also provides a key metric for the Science Based Targets initiative, a partnership which measures whether companies comply with the necessary reductions described in the Paris Agreement.

4. Who is pushing for this?

Companies are facing increasing demands to disclose their full environmental impact from investors, such as pension schemes and sovereign wealth funds, as well as from their employees, regulators and activists. Institutional investors, including Amundi SA, Europe’s largest fund manager with more than $2.2 trillion in assets under management, have pledged to use their vast resources to fight climate change. Governments are also beginning to care about scope. UK authorities have moved to compel listed companies to disclose weather-related data, and the US Securities and Exchange Commission is considering doing the same.

5. Are companies reacting to pressure?

They start to. Some are starting to clean up the supply chains they’ve left to their own devices for decades. Oil and financial companies, in particular, have come under increasing scrutiny. Exxon Mobil Corp. gave the oil industry a boost when it first disclosed in January 2021 emissions data relating to its customers’ use of its fuels and other products. But there is still a long way to go. HSBC Holdings Plc and Barclays Plc revealed in February 2022 that they were each responsible for so-called financed emissions – those created by the companies and the projects for which they provide loans or subscriptions, counted as scope 3 emissions – equivalent to around 18% of the UK’s total carbon footprint. This followed a historic series of climate disclosures from BlackRock Inc., which indicated that the asset manager’s emissions at least rivaled those of Volkswagen AG, Europe’s largest automaker.

More stories like this are available at bloomberg.com

About Frances R. Smith

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