I have been involved with Scope 3 since it was born in 1998 – that’s when the greenhouse gas protocol came up with the definitions of Scope 1, Scope 2 and Scope 3.

What are Scope 1, Scope 2 and Scope 3 Emissions?

• Scope 1 is the energy of the emissions from operations inside the companies’ four walls.
• Scope 2 is the emissions mostly from purchased energy.

In fact, for those of us in this part of the world, where district cooling is not that uncommon, I could point out that when I first read about these scopes, the people who wrote the definitions hadn’t thought of district cooling; they only mentioned district heating, so I communicated with them and asked them to remedy that.

Scope 3 is the emissions from the two ends of the scale, which are the things that happen before something arrives in the company. The things that happen after something leaves a company’s doors. Most of us will spend our time concentrating on Scope 3, on supply chain emissions. However, plenty of companies are not very serious about their customers’ emissions, particularly companies that, for example, are selling automobiles or other energy-consuming things.

Where do Greenhouse gases come from?

I always remind everyone that we’re here for this thin blue line, our atmosphere. This tiny bit of distance between land and the darkness of space is what keeps us all alive. We’ve lived with Goldilocks climate for thousands of years. Still, as you’ll all know, we’re messing it up because we’re pouring enormous amounts of greenhouse gas, carbon dioxide and other greenhouse gases into the atmosphere.

I would also like to point out quickly that some of these greenhouse gases come from industrial processes and some from methane from waste. A fair bit comes from agriculture and land use – when you chop down a forest, you immediately reduce the amount of carbon oxide absorbed from the atmosphere, so equally, you’re adding to the amount that stays up there.

However, as you can see from this chart from the World Resources Institute, 73% of all greenhouse gas emissions come from energy use, and we need to understand that when we’re thinking about Scope 3, it’s about energy use. I think 11 or 12 of those 73% are from residential energy use, and 61% or 62% are from business or organisational energy use. So, it’s very clear what the culprit is and what we need to tackle.

Scope 3 is nothing new

I would also like to point out that it’s not something new, although we’re getting very urgent about Scope 3. In 1856, a woman in upstate New York in the United States – not a scientist, I guess you can call her an amateur scientist – figured out that burning coal in large quantities would increase carbon dioxide in the atmosphere. She calculated that this was going to create some sort of global warming. She managed to find a university professor who partnered with her so she could publish a paper because she wasn’t a professional scientist.

So, we have a record from 1850, which tells us that we knew about these three years before the first commercial oil well was built in the United States, so she was certainly ahead of her time. I would also like to remind people that back in 1965, US President Lyndon Johnson was already telling people he wanted Congress to tackle the problem because he said carbon dioxide is what is altering the composition of the atmosphere.

These are the Scopes you’re well familiar with, and perhaps many of you will have seen this graph too, reminding us the orange line is the Scope 3 percentage that the World Resources Institute calculated for different industry types. The financial services sector has close to 100% of carbon emissions. Many other industries, which you think would be pretty energy-intensive, except for really energy-intensive things like making cement and steel, in metals and mining, for example, even the oil and gas industry, most of their emissions come from Scope 3.

Some mental models to help you understand Scope 3

So, it’s super important that we understand that this is a high priority. I also want to share some mental models I use to help people understand Scope 3. I usually give a long talk about these, so I will try to say them in two sentences – I’m not trying to teach you the basics of Scope 3 in this little session. Still, I want to give you the benefit of some thinking, which has helped people understand Scope 3 more clearly.

• The first mental model that is very helpful is to think of Scope 3 as the progression of phases. Often, in a conversation about Scope 3, I find people jumping around different parts of these phases without even perhaps recognising that they are phases.
• Having conversations about reporting, which are the material and Scope 3 emissions, and how they will deal with them, and having that kind of mixed understanding isn’t too helpful. So, I always encourage people to stop and break down their understanding of Scope through emissions into these 4 phases.
• I also suggest that while Scope 1 and 2 have been quite well addressed by many corporations worldwide, Scope 3 is proving a challenge to virtually every corporation required to disclose their Scope 3 numbers.

I put it this way: I say, well, Scope 1 and Scope 2 could be dealt with like a project. I used this graphic – if a company decides to stop burning oil to produce heat and switch to electricity, it just requires a person in authority to say, “Take away the boiler, and we’re going to replace it with an electric heater”, and as long as the electricity is carbon-free, they’ve immediately addressed the entire Scope 1 problem. And Scope 2 can be addressed like that as well. If you need clean electricity, but your factory isn’t in the right place, then you probably better think about putting your next factory in a place where it’s readily available. Scope 3 is, by definition, not a project; it’s basically a new way of doing business. It’s an internal new way of doing business, so it’s not a project; it’s a process.

• The third mental model that I encourage people to think about is who’s pushing for Scope 3 recognition, calculation and disclosure, and to understand the motivation of those parties or the influence of those parties. Do not simply assume that a stock exchange has told the company to do it and that the companies have told their suppliers to do it. We’re understanding the motivation of the party in much more depth.

Above all, scope 3 is being pushed by governments because they know they need to stop carbon emissions if they want the country or their city to survive in the next 50 years. Long-term investors are particularly interested in Scope 3 disclosure because they want their investments to be worth something 20 and 30 years from now. These days, many of us know that companies, customers, employees, the community, and peer pressure are also pushing Scope 3 forward. So, understanding the source of this motivation can be helpful.

Independent parties are writing some of the regulations and rules, and they also greatly influence how we deal with the Scope 3 parts. I mentioned these parties, such as stock exchanges, telling us what to do. Still, again, thinking through each of them, understanding their motivation, and writing down what their motivation is today and where you expect to be 3 years from now and five years from now are ways to make solid decisions about your Scope 3 work.

Q&A

What can you do with an uncooperative single-source supplier in providing Scope 3 data?

If you’re a company that must disclose your Scope 3 data, this is a challenge you must step up to. If you’re still not to the stage where you must inform them, it’s probably a good time to start a dialogue. But, if your first report needs to come out on December 31st 2024, which some Hong Kong companies have to do, or January 1st 2025, more accurately, then maybe it’s a little late to tackle it.

In my experience, there are single-source suppliers for certain things. If you’re building something or using some product that’s been mined and it’s, for example, quite rare or quite challenging to get hold of and use, or you’ve placed a 5-year order for this product. Suddenly, you discover this supplier is not cooperative in providing the data – various metrics are available in the public domain. Most of them are government-provided metrics. If you are trying to determine for, say, 200 tons of iron ore what the emissions were and producing 200 tons of iron ore in a certain type of mine in the Congo, for example, and the company there wasn’t providing you with the data you needed for your report, you could find comparable numbers on the Internet from government entities or academic entities. You could use those as a substitute.

As with most things in Scope 3, the best thing is to make sure that you’ve explained everything in your declarations about your data, which data you’ve used that came directly from a supplier. Let’s say a common factor for that particular product or that particular service for that matter. It can happen, and of course, even if they’ve given you the data, you’re still left with a question about whether you think it’s reliable. So, it’s a good idea to cross-check against those public databases to see whether the data that you’ve been given matches.

Scope 3 was born in 1998, so we’ve had plenty of time to build this data up now that it’s intensely scrutinised and demanded. Honesty makes things easier for everybody because everyone knows the realities, and no one can say they’ve never collected this data or why they should share it with you. Everyone knows they need it; even if some suppliers prove difficult, there are still ways around it.

There was another question on compliance: How do you ensure compliance from your business partners in your supply chain? Which goes towards that reply that I’ve just given – there’s no penalty at this point in time, but you could write them off your vendor list; you could, at some point, view their status on your supply chain.

For example, we can talk about Walmart because it was the first company that really strong-armed its suppliers. I think in 2007, Walmart gathered thousands of their top Tier 1 and Tier 2 suppliers into a giant arena in Beijing and got up in front of them and told them loudly and clearly that there would come a time when companies would get cut off the procurement list from Walmart if they didn’t satisfy their energy efficiency standards. They weren’t talking about carbon emissions, but of course, Walmart knew perfectly well that’s where they were coming from – energy efficiency or inefficiency.

I can’t say with the full knowledge about whether they used the term energy efficiency because people could grasp that better. Walmart was adamant, and I know that all my senior executives not only said the same to their suppliers but also had similar conversations with their employees. They said this is the way this company is going, and some of you will love it, and some will leave to find a job elsewhere. So, some companies have been pretty tough.

What developments have you observed regarding the use of life cycle assessment?

A life cycle assessment is a really interesting process. It’s been practiced for more than 30 years, which I know of, and it’s a way of analysing every part of and beyond Scope 3. It looks at the carbon emissions and everything down the supply chain from a total environmental perspective. The interesting thing that’s emerged recently is that because data accumulation is improving, life cycle assessment practitioners have been given a golden cup with data they would have previously struggled to estimate. They get accurate numbers, so conducting a lifecycle assessment before doing something, e.g., building a factory or starting a transport entity of any description or post facto, is now significantly more accurate than it would have been 20 or 30 years ago. We can credit the Scope 3 disclosure effort with much-improved accuracy.

Is it better to set ambitious Scope 3 reduction targets or to choose targets that will be easier to reach?

I give my clients credit when they ask themselves these questions as it means they’re thinking. They realise that there are two ends of the spectrum, and they will find where they want to be along that spectrum. Yes, there is a minimum ticking the box, and there is a maximum overstretching your ambitions. Saying that you’re going to be net zero by 2026, for example, but the brain work needed to go into finding that perfect position for your company is a positive thing for it to understand its situation and begin to set itself on a path to reach its numbers. I don’t have any problem with companies that set relatively easy-to-meet reduction targets; if they do it with the right intention now, they do it because they have a particular goal in some other area they don’t want to damage. We’ll invest in the companies that overextend themselves and are likely not to produce the results we want, as well as the companies who super underextend themselves, so again, I think that it’s a valid question to ask.

And I suppose that that’s one where board directors have to be critical because they will be held liable for it, and there are many reporting requirements. As of 1^st Jan next year, Hong Kong companies have to start meeting those requirements.

Where do you advise SMEs to begin in the decarbonisation journey?

I advise them to begin with the first phase of the 4 phases I listed at the very beginning. I recommend that they spend a lot of time and effort understanding their emissions. This is now, in 2024, becoming more the norm – companies stop and spend some serious time and sometimes some serious money identifying their material emissions.

First, understand their Scope 3 emissions because if they’ve never done the analysis, why would they have that information at hand? It’s a brand-new idea, but I think it’s important to understand and prioritise before worrying about calculating and having a difficult conversation about disclosing. The most crucial step, which isn’t doing the reduction but spending the time and effort to understand at the beginning, will save a lot of tears. I’m sure many of us can think of companies that have been very enthusiastic or some salesperson who has sold the idea and began working on something and then found that it wasn’t the most important.

I’ll give you an example which I found super fascinating. In the United States, there’s a massive retailer called Costco. It’s a fascinating chain of stores that sells things in bulk, and people drive up in their big American cars and giant American shopping baskets, filling them up and going home to their big houses to store their stuff. You would have imagined that Costco’s biggest emissions were due to the giant shops and giant warehouses and the giant fleet of semi-trailers they have to ship products around the United States from warehouse to store. However, it turns out that Costco’s largest emissions, as a percentage, are because the Costco credit card is issued by Citibank, which has enormous investments and lends to the oil and gas industry. Due to that lending, it has a huge carbon footprint, and Citibank’s total emissions are more significant than all of Costco’s shops and the combined emissions from its trucking!

The analysis from the World Resources Institute identifies the percentage of total emissions from various industries from Scope 3. Even now, I hear a lot of experienced people saying Scope 3 is 60% or 70% of the total for most companies, but when you look at it, it’s way more than 60% or 70%. The top ones are:

• Financial services
• Capital goods
• Transport
• Original Equipment Manufacturers
• Real Estate
• Construction
• Metals and mining
• Agricultural commodities

In the case of Hong Kong, we’re a financial services centre; more than 50% of the Hong Kong economy is from financial services, so those companies are really on the line had to deal with their Scope 3 emissions – which come from the people they’re lending to just like the Citibank story.

Oil and gas processing businesses in Singapore account for 89% of Scope 3 emissions. So, when companies begin identifying and then deciding how to calculate and disclose their emissions, it’s a significant part of stopping climate change from worsening.

What role do innovation and technology play in reducing Scope 3 emissions? And can you provide examples of successful innovations?

Innovation and technology are two different things, and I want everybody who’s got any responsibility for dealing with Scope 3 – and sooner or later, that will be every single person on the payroll – I want them to think of innovation, not technology. I want them to think about innovation as the way they do things, the way they make decisions, the priorities they put on things, their expectations for financial returns, and working on investing in Scope 3 reductions.

People have been calculating for at least a decade that we already have all the technology we need to stop increasing the damage we’re doing to the climate. So, we don’t actually need any new technology. Yes, we’re human, and we’ll continue to develop new technology – and for many people, it’s fun to create new technology. But the fact is that it’s not what we’re depending on. We’re not waiting for some magical technology to come along to solve climate change and take care of our Scope 3 problems.

AI can help people analyse the data better and identify blockages quicker than they might have otherwise. We’re looking at things now from space that we never looked at from space before to help us identify methane leakage in the middle of Azerbaijan or inaccurate reporting of emissions from oil and gas plants. I know that in the northern United States, where they do a lot of fracking, again, that’s become quite controversial, and that information is now available due to technology. We shouldn’t stop thinking about innovation and keep it only to the topic of technology.