The 4 D’s of accelerating the transition: Ditch Disclosures, go Directly to Decarbonization
From the very early days of climate discussions, a basic premise around decarbonization has been that we can only “manage what we can measure.” So, we started measuring in earnest with model-based emission calculations and other snazzy tools – and got really good at it – but after more than two decades, we are still waiting for the much-anticipated managing part to happen.
The intractability of scope 3 emissions
Emissions accounting and disclosures have now exploded into a large and growing industry of SaaS platforms, data providers, consultants and ESG ratings services. In the US, the upcoming SEC climate disclosure rules will essentially codify the “scope 1-2-3” reporting standard for all public companies. Since scopes 1 and 2 are relatively trivial to track and report, most of the cost and effort in climate disclosures are going, and will increasingly go, into scope 3 which can exceed 80-90% of the total emissions in many industries.
Since supply-chain data is hard to get – even for large companies – most scope 3 estimates use secondary or industry-average data for material production and processing. This alone makes the estimates impossible to interpret or to act on because the numbers have no plausible link to specific suppliers or even geographies. Now, even if a company were able to get precise data from its suppliers (a big ‘if’, we think), it should be kept in mind that reducing scope 3 emissions can only be achieved by convincing suppliers to implement vast, disruptive, and costly changes to how they run their companies – for which they have neither the incentives nor the capabilities.
This intractability of scope 3 emissions is the fundamental reason that there are few, if any, cases (at least none that we can confidently cite) of large companies that have significantly slashed their supply-chain emissions – in other words, where measuring scope 3 emissions of a particular company led to a significant, identifiable reduction in those emissions.
Let us talk hypothetically for a moment. What if every company in the world simply focused on its own scopes 1 and 2 so that there would be no need to account for or reduce supply-chain emissions? Everyone’s scope 1 and 2 is someone else’s scope 3 after all. What would that do – could that be a solution? Well, it would greatly simplify the reporting. Good news! But it would not get us any closer to decarbonization.
This is because the world of decarbonization is not a conveniently siloed ecosystem of companies that operates separately from society. We should keep in mind that behind all ‘scope 3 emissions’ there are… people! Consumers like you. And us. We drive cars, we fly to Bali, we import avocados from Chile, we use air conditioning, we live and work in buildings made of steel and cement. All these activities rely on economic systems – power, industry, agriculture, transportation, the built environment – that are hideously complex, driven by enormous and growing demand from all eight billion of us global citizens, and cannot simply switch energy sources overnight. In other words, at the end of the day, the world’s consumers are responsible for scope 3 emissions and if we think we can solve this problem by demanding that all companies reduce scope 1 and 2 emissions then we are deluding ourselves.
Scope 3 reporting has not led to decarbonization
Three things to note:
- This demand for stuff, travel, housing, and food is not going to decline anytime soon, no matter what advocates of degrowth (that we have a lot of sympathy for) might say. And even if consumers, acting in concert, somehow manage to force some of the production away from the most destructive products (as one of us recently suggested), companies worldwide will still need to produce huge quantities of products – products that would then perhaps be marginally less carbon-intensive, but this would never be enough to move the needle as much as it needs to be moved.
- Individual companies operating within – and embedded in – these economic systems can do very little to influence the emissions attributable to their own operations. They would have to take extreme steps, such as seriously slashing production, to get to any serious emission reductions, in which case other companies would simply step in to meet the demand – so the net result would be zero change to emissions.
- These complex international economic systems can effectively only be changed through public policies – i.e., government actions – that address both supply and demand, through taxes, laws, subsidies, and spurring innovation in low-carbon technologies. This is why governments, not companies, are the signatories to the Paris Agreement, and why academics, thinktanks and trackers who try to determine if we as a planet are in line with Paris goals look almost exclusively at government plans (NDCs, in Paris jargon) to tax, regulate, subsidize and innovate, and do not look at all at companies’ scope 3 reduction targets or transition plans.
All of this brings us back to this simple point. Despite the good intentions, reporting scope 3 emissions has not been a starting point for decarbonization but has largely proven to be a dead end. It is premised on the idea that whoever the emissions can be attributed to can also get rid of them. They can’t and won’t.
Decarbonization does not require scope 3 emission disclosures
We already know how to slow down the emissions trajectory and eventually get to net zero – this does not require more ‘scope 3 emissions’ information. And the emissions information that is needed – at the systems level, not at the company level – is available. In the US, the Inflation Reduction Act is a clear example of how policies and incentives can turbocharge investments in electrification, renewable energy, batteries, and grid upgrades. It was introduced not a year ago and is already beginning to initiate decarbonization at scale. How much did the IRA depend on scope 3 emissions information disclosed by companies? Zero point zero.
Yet, we are wasting so much valuable time forcing companies to disclose their “full” emissions and then to commit to “net zero” targets when they in fact have neither the tools nor the incentives to fix the climate problem on their own. Companies, after all, exist to provide specific goods and services to their customers, and they should be allowed to do exactly that while operating within net zero roadmaps established by governments representing all of us.
In other words, it is time to replace the “companies will fix it” narrative that we have heard for so long with “governments should fix it.”
A smarter strategy: go directly to decarbonization
A much smarter decarbonization strategy would bypass scope 3 emission disclosures altogether and use laws like the IRA as a template to accelerate decarbonization across economic systems. These incentives would need to be combined with strict standards for direct emissions from critical sectors like power plants and transportation. Just imagine the simplicity of being able to set national emission reduction targets – the models here are the 26 countries that already have net zero enshrined in law – and then put in place policies to make the private sector do the actual work of getting us there.
No disclosures required. Go directly to decarbonization.
A closing note: If we let companies off the hook on emission disclosures, how will we assess their climate risk? We will have more to say on that topic in an upcoming piece in which we will make the case that a company’s scope 3 emissions bear little or no relation to its physical or transition risk.
illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.
About the authors
Harald Walkate is the founding partner of Route17, an independent blended finance advisory. He is also founder of Finding Ways Ahead, an ESG and sustainable finance advisory, and a Senior Fellow at the University of Zurich Center for Sustainable Finance and Private Wealth (CSP). Previously he was the Head of ESG and member of the Executive Committee of Natixis Investment Managers, and the Global Head of Responsible Investment at Aegon Asset Management.
Kumar Venkat is the founder and CEO of Climate Trajectories, a company providing climate data services. He previously worked at the forefront of corporate carbon emissions accounting and decarbonization as the CTO of Planet FWD and CEO of CleanMetrics.