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Is that net-zero pledge worth a damn? Check the Scope 3 emissions

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The climate crisis is accelerating, and some big companies want to help stop it. At least, they want to be seen to be helping – whether or not they’re actually committed to being part of the solution is harder to tell. As a consumer trying to tread lightly on the planet, I like knowing if companies are indeed sustainable. But corporate climate transparency can be surprisingly murky.

From a climate point of view, a company’s net-zero plan offers a focused look at their playbook for the most pressing challenge of the future. Will they be on the field, or on the bench? Or heckling from the stands?

In January, Exxon announced its “ambition” to reach net-zero greenhouse gas emissions by 2050. On its face, that’s great news – an oil major with a goal to stop contributing to global warming would represent a substantial shift in the transition to clean energy. But scratch the surface, and the plan seems more like a diversion than an example of true ambition. Exxon’s strategy fails to account for emissions from the oil and gas it sells, making it little more than a fig leaf covering an embarrassing commitment to business as usual. By ignoring the impacts of its core products, Exxon highlights the limitations of a net-zero policy that doesn’t include what are called “Scope 3” emissions.

What does “Scope 3” mean, and why is it important? Sammy Herdman at Environment America has covered that question in detail, but here’s a quick summary. Scope 1 emissions are direct greenhouse gas emissions from sources controlled or owned by an organization, like a company car or refinery furnace. Scope 2 emissions occur offsite but power onsite work, like electricity bought from a utility.

Scope 3 emissions are broader, often representing 70% or more of an organization’s greenhouse gas emissions. They include all of the emissions associated with doing business and selling products that aren’t included in Scope 1 or 2. In practice, that covers things such as commuting, business travel and, most critically, the sourcing, use and disposal of the products the company sells.

Ignoring its Scope 3 emissions would allow Exxon to someday claim to be a “net-zero company” that still produces and sells millions of barrels of oil a year. If that sounds like greenwashing, well, that label appears well-founded according to a study that examined the chasm between oil companies’ discourse and their actions. It’s certainly possible for an oil company to take its Scope 3 emissions into account: Shell has an (albeit court-mandated) commitment to reduce its Scope 3 emissions.

Unfortunately, a net-zero pledge that includes Scope 3 emissions doesn’t automatically guarantee a real commitment to sustainability. A study of 25 companies with some form of net-zero pledge found that Scope 3 emissions made up an average of 87% of their total emissions, but only eight companies disclosed even a moderate level of detail about their plans to address Scope 3 emissions. Only three had clear commitments to reducing 90% of their full value chain emissions – a benchmark for a truly comprehensive accounting of Scope 3 emissions.

To be taken seriously as a sustainable business, a company must have a goal of reaching net-zero greenhouse gas emissions by 2050 at the latest, with interim benchmarks. A net-zero target means they care about looking green, but if their plan doesn’t cover Scope 3 emissions, they could be ignoring the majority of their total climate pollution. A plan that does cover Scope 3 should cover a high percentage of the full value chain – those emissions central to the company’s core business, like the creation, use and disposal of the products they sell.

Popular demand can push companies to strengthen their weak Scope 3 commitments. Costco, the world’s third-largest retailer, was shoved toward sustainability by a shareholder proposal brought by Green Century°, the first family of fossil fuel free, responsible and diversified mutual funds in the United States, which is affiliated with the Public Interest Network (as is Frontier Group*). This first-of-its-kind proposal called on the company to set short-, medium-, and long-term emissions reduction targets to achieve net-zero emissions by 2050 – including Scope 3 emissions.

Previously, Costco had estimated Scope 3 emissions from only a narrow slice of its business: “waste generated from operations.” Thanks to the shareholder vote, Costco will now estimate Scope 3 emissions from its “purchased goods and services,” representing the majority of their Scope 3 emissions. Nearly 70% of shareholders voted in support of the proposal, which will bring to light the emissions deep within Costco’s supply chain, such as deforestation linked to the products on its shelves.

New SEC rules announced in March 2022 will increase emissions transparency by requiring companies to disclose and verify their Scope 1 and 2 emissions. Scope 3 emissions must be disclosed (but not verified) if the company has climate goals that include Scope 3 or if those emissions are expected to be material – that is to say, large enough that they’re relevant for investors assessing a company’s exposure to climate-related risks. The definition of “material” Scope 3 emissions should be sharpened, but the transparency will make it easier to determine which companies are serious about decarbonizing their value chains and which are not.

As consumers demand increased corporate sustainability, many companies will be tempted to plan for business as usual and cover their actions with greenwashing. Regulators and watchdogs should keep up the drumbeat for environmental transparency and monitor how corporate actions align with stated goals. We consumers can play our part by paying attention to whether companies are setting worthwhile goals to begin with.  

Photo credit Chris LeBoutillier via Unsplash.com 

°Green Century Capital Management, Inc. (Green Century) is the investment advisor to the Green Century Funds (the Funds).

*Frontier Group is not a registered investment adviser and is not providing any investment advice to any reader of this blog.