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- Corporates with an internal carbon price that is mandated for all business decisions are 4.1x more likely to have a 1.5°C-aligned transition plan with a Scope 3 target (upstream).
- Corporates with climate-responsible board are 4.8x more likely to have a 1.5°C-aligned transition plan with a Scope 3 target (upstream).
- Corporates that engage with suppliers are 6.6x more likely to have a 1.5°C-aligned transition plan with Scope 3 target (upstream).
Supply chain Scope 3 emissions are significantly higher than operational emissions, yet often overlooked. Despite their scale, only a fraction of corporates set targets for these emissions. The responsibility to address this gap lies with both corporates and investors. Immediate actions include enhancing board climate competence, engaging suppliers, and adopting internal carbon pricing.
Scope 3 Emissions: Addressing the Overlooked
Supply chain emissions are 26 times higher than operational emissions. Yet, corporates focus more on operational emissions, with only 15% setting upstream Scope 3 targets.
The Role of Boards and Management
- Climate-Responsible Board: Corporates with climate-responsible boards are 4.8 times more likely to set Scope 3 targets. Yet, only one-third of companies have such boards. Boards need to integrate climate competence to drive action.
- Supplier Engagement: Corporates engaging suppliers are 6.6 times more likely to have a 1.5°C-aligned transition plan. However, only 4 in 10 engage suppliers on climate issues.
- Internal Carbon Pricing (ICP): Corporates with ICP are 4.1 times more likely to align with 1.5°C targets. Only 14% use ICP, underscoring the need for widespread adoption.
“Keeping warming to 1.5°C is at risk, and hence action is more urgent than ever,” says Sherry Madera, CEO of CDP. “Corporates and investors need to lead. Supply chain emissions, often overlooked, pose a $335bn+ liability. It’s a shared responsibility to act.“
Investors’ Responsibility
- Pricing Climate Risk: Only 1 in 2 corporates evaluate financial risks from upstream emissions. Investors must demand transparency and price in these risks. Less than 10% require Scope 3 disclosures from investees.
- Climate-Adjusted CAPM: Integrating climate risks into the Capital Asset Pricing Model (CAPM) can drive better valuations and encourage corporate transparency.
Immediate Actions
- Boards: Nominate climate-competent members and mandate Scope 3 risk quantification.
- Management: Engage suppliers and set Scope 3 targets.
- Investors: Demand emissions transparency and integrate climate risks into valuations.
“Internal carbon pricing is critical to pinpoint festering costs and risks associated with climate change,” states Paula DiPerna, CDP Special Advisor. “It prepares companies for likely mandatory global carbon pricing regulation.“
Related Article: Companies Disclosing Climate Transition Plans Up Nearly 50%: CDP Report
The path to reducing Scope 3 emissions is challenging but necessary. Corporates and investors must collaborate, enhance transparency, and adopt proactive measures to mitigate climate risks effectively.