Companies’ dirty little secrets over greenhouse gas targets

Lots of companies talk a good game about cutting planet-heating greenhouse emissions but their disclosures and targets have tended to focus on the emissions over which they have direct control and which are the easiest to measure. That is fine in an industry such as cement, where the bulk of carbon pollution occurs during the production process. From an environmental perspective these direct, or “Scope 1,” emissions are the main problem caused by these particular companies.

But the approach falls down in companies working in oil, mining, carmaking, finance, and even fashion, because oftentimes most of their carbon footprint is contained in the products they sell or help finance — not their own operations.

An oil giant can boast all it likes about how it has reduced gas flaring; if car drivers are still filling up with its petrol, the planet will keep getting hotter. The same goes for an iron ore producer that touts how its mining trucks are incredibly fuel efficient but whose main product is the basis for steel production. Luxury goods suppliers may run the greenest workshops imaginable, but use fabrics and materials that are deeply damaging to the planet.

In the past, so-called “Scope 3” emissions — the pollution contained in products sold to customers or in goods and services purchased from suppliers — either weren’t calculated or were seen as someone else’s problem. Thanks to pressure from institutional investors and activists, plus leadership from a few enlightened chief executives, corporate attitudes about this subject are evolving fast. “Scope 3 is the elephant in the room,” Mark van Baal of investor advocacy group Follow This told the Norwegian oil major Equinor ASA’s annual meeting last year.

New impetus

The new impetus is welcome because unless companies try to reduce the environmental damage of their products and purchasing decisions, efforts to limit catastrophic climate change will fail.

At the World Economic Forum in Davos last week the bosses of some of the world’s biggest oil producers debated setting targets for Scope 3 emissions, which typically make up about 90% of their carbon footprint. BP’s new boss Bernard Looney is poised to abandon his predecessor Bob Dudley’s opposition to targeting customer emissions, according to Reuters. Royal Dutch Shell, Repsol and Total have already set Scope 3 targets.

In mining, Rio Tinto argued it had “very limited control” over customer emissions but later bowed to pressure by promising to work with its customer (and China’s top steel producer) Baowu Steel on lowering the steel sector’s emissions. BHP and Vale have gone further by promising to set goals for Scope 3 emissions. In BHP’s case these are almost 40 times greater than its direct pollution.

The EUs new guidelines on climate reporting also recommend that large companies disclose customer and supplier emissions. Banks and insurers, whose direct emissions are typically pretty negligible, should focus on their counterparties’ emissions, the guidelines say. Unfortunately, this is not yet legally binding.

Reluctance to target this stuff is hardly surprising because the numbers can be huge. VW acknowledged in 2019 that its vehicles are responsible for about 2% of all the CO₂ produced by humans.

Among the largest Scope 3 polluters are companies that the public probably does not immediately think of as big climate sinners. It i s no surprise that Shell and Petrobras make the list, but I had not thought about Cummins, which sells truck engines and industrial power generators, Nexans SA, whose cables transport electricity and data, and Daikin Industries Ltd, which builds air-conditioning units.

I’m not knocking these companies; at least they are disclosing these emissions and some are setting targets to reduce them. Cummins plans to reduce absolute lifetime emissions from newly sold products by 25% by 2030, for example.

Complicated exercise

Calculating the emissions from sold products is a pretty complicated exercise too. ThyssenKrupp’s massive Scope 3 emissions include those contained in the steel in the cars we drive around, the cement plants its factory construction unit helped build and the elevators in office buildings. Daikin has to consider the probable lifespan of its air conditioners, their energy consumption and what kind of electricity they’re powered by, plus probable leakage rates of planet-heating refrigerants.

Fortunately there is no shortage of organisations and methodologies to help compile these data. (Michael Bloomberg, founder of Bloomberg News and its parent Bloomberg LP, chairs the FSB Task Force on Climate-related Financial Disclosures).

Regrettably, not all large manufacturers have seen the light through the smoke. The copious sustainability reports of some companies still do not spell out the total emissions of the products they sell. Volvo told me there is no globally harmonised standard on how to calculate and disclose CO₂ from heavy-duty trucks, but that it is evaluating opportunities to report on this in future. Daimler, which wants a completely CO₂ neutral truck fleet in key markets by 2039, plans to start disclosing Scope 3 emissions for trucks in its next sustainability report.

You know something’s up when it takes a hedge fund to tell a company to clean up its act. The shortcomings in aircraft maker Airbus’s Scope 3 emissions reporting were highlighted in a critical letter late last year from Chris Hohn’s TCI Fund Management, the world’s most profitable activist fund.

Airbus and rival Boeing have committed to halving the aviation industry’s net emissions by 2050. It would help focus minds on that urgent task if they fully accounted for their own role in flight pollution. If Shell can do it, why not them?

• Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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