Transcript
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Speaker: The following podcast was recorded for publication on the 1st of August.
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Speaker: Welcome everybody to the ESG Brief from the team here at HSBC Global Research.
Speaker: I'm your host, Jack Reed, and in this edition we are joined by our Head of Environmental, Social and Governance Research, Wei Xin Chen.
Speaker: Today we're talking about the disclosure by companies of their Scope 3 climate emissions.
Speaker: What are Scope 3 emissions and how widely disclosed are they?
Speaker: Well, Wei Xin is here to explain this less developed, perhaps, but no less exciting aspect of climate disclosure.
Speaker: Wei Xin, welcome.
Speaker: Thank you very much, Jack.
Speaker: Yes, I think Scope 3 emissions are extremely exciting.
Speaker: So very good to be here.
Speaker: Let's start with the definitions.
Speaker: What are Scope 1, 2 and 3 emissions?
Speaker: Absolutely.
Speaker: Scope 1 emissions are the direct emissions from, say, the combustion of fossil fuels.
Speaker: So if you are a coal-fired power plant, all the coal that you burn, that is your scope 1 emissions.
Speaker: Scope 2 emissions are indirect emissions.
Speaker: So the emissions generated from the consumption of electricity and heat, so the purchases of electricity, and it would require to know the carbon intensity of that electricity production.
Speaker: Now scope 3 is everything that is not included in scope 1 and scope 2.
Speaker: So it is the full value chain emissions that a company has possibly a bit of influence over, a bit of control over, right upstream from the beginning, the extraction, the production and transportation of materials, right down to the downstream, the consumption of the products and services, as well as the end of life.
Speaker: So a very, very broad swathe of emissions there.
Speaker: So lots of emission sources there, but not a lot of emissions that companies are actually talking about.
Speaker: So many, many companies are now disclosing their carbon emissions.
Speaker: Definitely scope one, that's fairly easy to calculate.
Speaker: Scope two is easy if you know the carbon intensity of the electricity purchases.
Speaker: The disclosure rates for scope one and scope two emissions have been improving, and that's because the regulatory requirements of various jurisdictions
Speaker: are there for them to disclose their emissions but very very few actually require scope 3 emissions disclosures scope 3 is where it becomes complicated and at the same time scope 3 emissions can often account for the largest share or part of corporate related emissions if we take the oil and gas industry for example they have direct emissions in the extraction of their of their fossil fuels
Speaker: They have probably less indirect emissions on the scope two, the operations for example, but the vast majority of emissions from a scope three perspective for an oil and gas company is when the end users, so car users and gas users commercially use their products.
Speaker: And that is definitely the largest share in terms of an oil and gas company.
Speaker: And where is the data coming from that you've been looking at?
Speaker: Scope 3 emissions are quite hard to combine.
Speaker: Not that many companies disclose it voluntarily.
Speaker: There are a few organizations which aggregate this.
Speaker: So the CDP, formerly known as the Carbon Disclosure Project, tells us which companies in their disclosure regime have Scope 3 emissions.
Speaker: The S&P Global 1200 Index actually has some interesting information on scope 3 emissions, and we can see through a lot of the different sectors that are a part of that, that scope 3 emissions are most often not disclosed by the companies in this index.
Speaker: And I suppose the research into this is complicated by the fact that there are so many sources of these so-called scope 3 emissions, both upstream and downstream.
Speaker: That's absolutely correct, Jack.
Speaker: There are actually around 15 categories of Scope 3 emissions, which makes it quite challenging to sort of find a breakdown on.
Speaker: If we think about the eight upstream categories, things like purchase goods and services, waste generated in operations and upstream leased assets.
Speaker: And when we look at downstream, we've got investments, franchises,
Speaker: end-of-life treatment.
Speaker: Not every company will be gathering the appropriate information in terms of emissions for all those different categories.
Speaker: So it makes comparing scope 3 emissions between one company and another very, very challenging indeed.
Speaker: Now in July you published a really comprehensive report on this topic and I'd like to come on to some of the feedback that you've received a little bit later on.
Speaker: But you refer to Scope 3 emissions in the title of the report as the largest piece of the net zero jigsaw.
Speaker: Why is it so important in your view?
Speaker: It's important for investors and other stakeholders to be aware of Scope 3 emissions because it helps them to better assess the potential risks and opportunities with the companies they invest in.
Speaker: For example, if a company has a large exposure to upstream emissions in their Scope 3,
Speaker: If there is a tightening of regulations or an increase in the carbon price, they would be better able to assess the effect on the company's potential costs if the carbon price goes up.
Speaker: At the same time, many, many companies that have net zero targets do not include scope three emissions within their net zero targets.
Speaker: So they're only implementing corporate strategies to reduce their scope one and scope two emissions.
Speaker: And that can give rise to the perception
Speaker: of greenwashing, which is never a good thing.
Speaker: So if greenwashing is a risk here, what are regulators doing to minimize that?
Speaker: So historically, there hasn't been that much regulatory oversight of Scope 3 emissions, but that's definitely changing.
Speaker: We think that Scope 3 disclosures from a regulatory point of view are on the horizon.
Speaker: We see that coming in, for example, in Singapore, in New Zealand.
Speaker: It's being proposed for a couple of years' time.
Speaker: I think it's 2024 for the European Union.
Speaker: And it was something that the SEC in the US mentioned, even though there was quite a lot of pushback.
Speaker: from companies.
Speaker: So it is entering the mindshare of regulators.
Speaker: At the same time, central banks have begun to include Scope 3 in their climate stress tests to see how resilient the financial system overall would be to a climate shock or anything like that.
Speaker: So it's definitely on the horizon for many, many companies and many, many economies.
Speaker: Weixin, among investors, how well understood are these Scope 3 emissions?
Speaker: The awareness has grown amongst the general investment community, but given the strong support we've had for this report after it came out, I think the awareness could always be improved.
Speaker: This is not just for the investment community, but also for the corporates themselves.
Speaker: it is definitely more challenging to disclose upon Scope 3 emissions because of the challenges of boundary setting, the challenges of timeframe, etc.
Speaker: So it's a while before we get a decent level of awareness and engagement, but we've seen a growth in the number of both companies and investors asking us questions about Scope 3 emissions.
Speaker: Two of the companies that you cite in the report for their level of disclosure are Alphabet and Google.
Speaker: What lessons do we learn from what they have to say about Scope 3 emissions?
Speaker: In our report, we highlight that Microsoft and Alphabet are one of the few companies that did give a breakdown of their scope 3 emissions to quite a bit of detail.
Speaker: From memory, it was eight, nine, or 10 categories disclosed, which is very, very good.
Speaker: The interesting takeaway there is that Microsoft and Alphabet, although they are similar companies in a very, very similar sector, the different categories which they chose to disclose upon for their scope 3 emissions
Speaker: were different, which means that actually getting comparability and consistency between two companies in the same sector is very, very challenging.
Speaker: One of the quirks of Scope 3 emissions is that they can occur over different time boundaries.
Speaker: For example, if you're looking at purchased goods and services, they may not necessarily have been made in the current year.
Speaker: They may be historical.
Speaker: And if we're looking at the end of life of your particular product,
Speaker: You have to make a guess as a company as to when that will happen.
Speaker: It will happen in the future, but will that be this reporting year or in a few years to come?
Speaker: So it's not easy for that comparison to be made, but it's a great start for companies to start to collect the data, to measure their exposure and begin to disclose that to the general public.
Speaker: And just in terms of background, who decides what's in scope for scope one, two, and three disclosures?
Speaker: So the scope one and the scope two and the scope three missions are defined by the Greenhouse Gas Protocol, an organization that was set up between the World Resources Institute, the WRI, and the World Business Council on Sustainable Development.
Speaker: And that WBCSD is the reason why most companies, when they're looking at their greenhouse gas emissions,
Speaker: accounting.
Speaker: They use the greenhouse gas protocol.
Speaker: So they are the ones, the organization, are the ones that have defined these 15 categories and they will continue to evolve.
Speaker: We don't think they cover absolutely everything.
Speaker: There have been a number of companies that have actually complained that they think there should be more categories.
Speaker: So we think there will be a continual evolution as more companies disclose on their scope three and more stakeholders say, well, this is
Speaker: not quite adequate.
Speaker: It doesn't tell us the entire picture.
Speaker: So this is something that will continue to evolve, but it will most likely fall under the greenhouse gas protocol.
Speaker: That's great, Weishan.
Speaker: Thank you very much.
Speaker: All super interesting to learn from you.
Speaker: Final question, is there a sequel?
Speaker: Funny you should ask that, Jack.
Speaker: There is actually something emerging called scope for emissions, which refer to emissions that no longer occur as a result of a certain activity by an entity.
Speaker: So they're often known as avoided emissions.
Speaker: However, there is no universal definition or accounting standard for scope for emissions.
Speaker: So it's probably something we will leave for another time.
Speaker: Weixin, thanks very much for your time.
Speaker: Thank you very much for having me, Jack.
Speaker: Always a pleasure.
Speaker: That's all the time we have for this edition.
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