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Scope 3 emissions: Building a resilient supply chain doesn’t happen overnight

Scope 3 emissions: Building a resilient supply chain doesn’t happen overnight

The August profit reporting season was fruitful for Coles Group, which recorded a surge in revenue to post an annual profit to $1.1 billion, a 4.8% rise from the previous year.

But the supermarket and retail giant also made another statement in August that was much less reported – its Scope 3 emissions supplier engagement target.

It was a significant move by Coles, who stated they intend to set sustainability targets with at least 75 per cent of its suppliers over the next four years.

But Coles’ goals should also serve as a call to action for small and medium enterprises to ensure they too are tracking and cutting their emissions, because big companies are taking notice.

Determination of Scope 3 emissions remains poorly understood. Many companies already focus on measuring and reporting their direct emissions (Scope 1) and indirect emissions from purchased electricity (Scope 2) but Scope 3 are emissions from a company’s value or supply chain, and are far harder to quantify.

They may include upstream emissions produced prior to a company’s products reaching a consumer, such as transportation of delivered goods or waste from the manufacturing process, as well as downstream activities including the use of sold products, or disposal and end-of-life treatments.

Scope 3 emissions are among the largest contributors of greenhouse gases, encompassing the lifecycle of the product including agriculture, processing, manufacturing, distribution and disposal.

In the case of Coles, Scope 3 emissions that might be considered include emissions from modes of transport that deliver fresh produce to supermarkets, or emissions from investments made using profits from its supermarkets.

Even as a business that has embedded sustainability initiatives within its operations for many years, Coles has acknowledged Scope 3 emissions make up most of its overall emissions.

Measuring and reducing these types of emissions is challenging because a company has less visibility and influence over their suppliers and customers.

But by gaining an understanding, a company can identify risks and opportunities, enhance operational efficiency, build resilient supply chains, meet stakeholder expectations and comply with emerging regulations.

Coles is seeking to better understand the emissions in its supply chain, to establish a baseline from which Scope 3 reductions can be made, and to take the lead on its ESG reporting.

Its commitment to science-based reduction targets by the end of June 2027 is part of the retailer’s move toward its overall goal of achieving net zero by 2050.

But as they better understand their value chain, Coles will be looking for fewer emissions in it, or they risk facing pressure from stakeholders.

To make improvements on Scope 3 emissions, a company must first understand and measure its own emissions, and those of its own supply chain, to establish a baseline from which a reduction can be made.

This can be a time and cost intensive process, however it is prudent risk management for small and large businesses alike, irrespective of where they may sit in the supply chain process as supplier, manufacturer, transporter or retailer.

From the SME’s viewpoint, a proactive approach in documenting and reducing emissions will allow them continued access to those large customers, or open up opportunities to supply to new customers by taking the place of those who could not keep up.

Equally important to operations is the value proposition that such strategies offer to current and prospective staff, who are increasingly choosing environmentally-minded employers.

The Department of Treasury is responding to the demands of investors and regulators for increased consistency, accuracy and transparency in documenting emissions.

The Australian Government commenced consultation in 2022 for a proposal for a mandatory disclosure regime for the reporting of climate-related financial information, and a second round has now commenced. It is expected Treasury will release a policy statement before the end of the year.

Almost 40 per cent of submissions from the initial round gave support for Scope 3 emissions to be included in reporting, despite the difficulties of data collection and calculations.

Pitcher Partners has made submissions in both stages, making representations on transparency, reporting and assurance obligations and the proposed timeline.

Our submissions reflect the concerns in the middle market. Big business cannot hope to meet their obligations around value chain emissions without the support of their suppliers, many of whom operate in the middle market.

The Australian Accounting Standards Board will develop standards that align with the International Sustainability Standards Board (ISSB) Climate Standard that will, among other items, mandate reporting of Scope 3 emissions. An exposure draft is expected be issued in October 2023.

This will come into play for an estimated 23,000 entities from as early as July 1, 2024, when the proposed phased timeline commences.

Transparency in documenting emissions can be difficult for brands to achieve – but it will be valuable and necessary as companies increasingly scrutinise supply chains and regulators develop reporting frameworks.

Building a resilient supply chain doesn’t happen overnight – it is an intensive process that may take years. Coles itself has set a four-year timeline to establish targets with its suppliers.

But it has set the standard required of its suppliers, demonstrating the value in reporting transparency while also being prepared to work collaboratively with suppliers with a common goal in mind.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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