Written by JP Stevenson, Customer Success Director – ESG Analytics from leading global assurance partner, LRQA.
In the face of a rapidly changing climate, businesses worldwide are grappling with the growing need to implement sustainable practices. As part of this, businesses must take into account the EU’s introduction of the Corporate Sustainability Reporting Directive (CSRD), which includes the Scope 3 emissions reporting mandate. Here, JP Stevenson, Customer Success Director – ESG Analytics from LRQA, explores how companies can be ready to meet this vital regulatory requirement.
The CSRD is the EU’s ambitious plan to tackle greenhouse gas emissions on an industry-wide scale. A significant element of the CSRD is the Scope 3 emissions reporting mandate. This requires companies to monitor, report, and ultimately decrease their Scope 3 emissions – indirect emissions that occur within a company’s value chain. These emissions can arise from a variety of sources, including purchased goods and services, business travel, waste disposal, and employee commuting. While many companies are making sincere efforts towards sustainability, not all are ready for the new mandate.
How are companies doing?
Recent findings suggest that a considerable proportion of British companies may be unprepared to adhere to the Scope 3 mandate under the CSRD. A Carbon Trust survey revealed that only 22% of UK businesses are currently tracking their Scope 3 emissions, which is a cause for real concern when considering the significance of these emissions in a company’s overall carbon footprint.
The issue is only stressed further by the World Economic Forum, which shows that just eight supply chains account for more than 50% of global emissions including food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services and freight. A significant share of the world’s carbon emissions is indirectly controlled by only a few companies.
The proof is in the data
For overall environmental risk and the air emissions sub-category, the UK ranks ‘medium’ according to LRQA’s EiQ platform, which ranks countries on their inherent supply chain ESG risk. This ranking is based on audit data conducted in the country and publicly available civil society data, including research from entities like the United Nations (UN) and International Labour Organization (ILO).
The UK’s score is based on audit non-compliances associated with whether a site has appropriately identified, controlled, monitored, and treated emissions. But for UK companies with suppliers located in other regions, their risk could be even higher. Some of the top sourcing countries for the UK include China, Germany, and the US, and while Germany shows low risk for air emissions, the US is marked high risk and China as extreme risk.
If operating in these regions, UK companies are likely to increase their ESG risk, highlighting the importance of tracking emissions from all three tiers. One major challenge British companies face is the complexity inherent in Scope 3 emissions. They permeate multiple layers of a supply chain and are often located in different regions, making their measurement and management a formidable task.
Despite the challenges presented by Scope 3 emissions, there are strategies companies can employ to prepare for the CSRD mandate. First, companies need to carry out a comprehensive assessment of their emissions to identify primary sources. This can offer a clearer understanding of their environmental impact and shed light on areas ripe for improvement.
Investing in appropriate technology and partnerships can also significantly aid companies in measuring and managing their emissions. This might involve employing carbon accounting software or working with environmental consultancies or assurance partners such as LRQA.
Finally, businesses need to adopt a proactive approach to emissions reduction, which could include setting ambitious targets, devising effective strategies, and continuously monitoring their progress.
Consequences of non-Compliance
The repercussions of failing to meet the CSRD mandate extend far beyond potential financial penalties from the EU; companies risk damaging their reputation and losing consumer trust. Moreover, failing to comply could impede a company’s ability to adapt to a future economy where sustainability is paramount.
It is estimated by the UN Environment Programme that global carbon emissions need to be reduced by at least 7.6% each year between 2020 and 2030 to limit global warming to 1.5°. Companies neglecting to address their emissions might find themselves unprepared for this impending shift. Ultimately, if companies fail to sufficiently address their Scope 3 emissions, we risk exacerbating the already severe impact on our planet.
Rising to the challenge
Though the EU’s Scope 3 emissions reporting mandate under the CSRD presents a formidable challenge to global companies and supply chains, it also offers a unique opportunity. By closely monitoring and managing their emissions, companies can do more than just comply with regulations – they can actively contribute to a sustainable future. There are complexities, but the potential benefits for both businesses and the planet make it a journey worth undertaking and, with assistance from a leading global assurance partner such as LRQA, business can be sure they are on track to navigate the CSRD requirements successfully.
For more information, please visit LRQA.com.