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Scope 3 emissions reporting is a hard sell down the supply chain

A just transition should protect smaller firms from paying the price for the carbon emissions of larger ones.

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The concept of a just transition must consider the rights of all workers as any economy moves to a low-carbon world and adapts to the new realities of climate change.

International regulators are pushing for listed companies to disclose their indirect emissions, holding corporates to account for their environmental impact upstream and downstream. Scope 3 emissions are critical for shareholders to measure the climate risk of their portfolios. Unlisted firms are not yet required to report on their Scope 3 emissions but are strongly encouraged to do so.

It is clearly a lot easier for large corporates to invest resources in collecting Scope 3 data than it is for small and medium-sized enterprises (SMEs). Imposing the same level of disclosure requirements on all companies, irrespective of size and resources, is incompatible with the concept of a just transition.

Imposing the same level of disclosure requirements on all companies, irrespective of size and resources, is incompatible with the concept of a just transition

This must be considered in any future regulation, which should limit indirect emissions reporting requirements to those companies that are at the very top of the value chain. This is because they have the ability and resources to provide such data.

While SMEs account for 90% of global businesses, most of the world’s greenhouse gas emissions can be traced back to a handful of huge global energy suppliers, such as Coal India, Saudi Aramco and ExxonMobil. These companies account for a larger share of the total carbon budget, so it seems only fair that they are held to stricter reporting requirements.

Implications

Scope 3 emissions reporting has significant implications beyond the environmental for large corporations such as these. Climate change mitigation policies targeting the most polluting sectors need to account for job losses, equal access to reskilling programmes, and compensation.

The Indian state of Jharkhand, for example, accounts for over 27% of the country’s coal reserves and houses the headquarters of two of Coal India’s subsidiaries, which employ thousands of people both directly and indirectly (Coal India has 259,000 employees). As the government goes ahead with plans to reduce carbon emissions, it will have to consider the socioeconomic impact on the local workforce to insure a just transition.

They should also focus on individual corporate responsibility.

A small or medium-sized company has little influence on decisions that its service providers and suppliers are making to reduce their carbon footprint. Strict Scope 3 reporting regulations will either leave that company exposed to reputational risk or force it to find different suppliers, which could jeopardize its own survival.

SMEs will transition quicker if they are able to first focus on practical, small-scale changes that can address direct emissions. Less than 50% of listed companies are adequately reporting their Scope 1 and Scope 2 emissions according to MSCI, so perhaps it would be more productive to focus on this first.

A small firm of mechanics that repairs coal-transporting trucks across Jharkhand should not have to look down its entire supply chain to identify how many tons of CO2 can be linked back to its business. Coal India, which accounts for 85% of the vast country’s total domestic coal production, is far better placed to do so.