Companies that fail to manage their Scope 3 emissions could face more than $500 billion in annual liabilities by 2030, as businesses face growing pressure and tightening regulations to slow the spread of climate change.
According to a joint study released on September 23 by ESG compliance platform EcoVadis and Boston Consulting Group, Scope 3 emissions — which are produced indirectly from a company's supply chain — are 21 times higher on average than Scopes 1 and 2 combined, yet just 24% of companies currently report Scope 3 emissions, and only 8% have set targets to reduce them. However, the report found that companies can get three to six times a return on their investment if they commit to decarbonizing their supply chains.
"The financial risks of climate inaction are clear, but so are the opportunities,” said EcoVadis co-CEO Pierre-François Thaler. "By addressing Scope 3 emissions, companies can protect profitability while building a more resilient supply chain."
The return on investment from decarbonization largely comes in the form of regulatory loss aversion, the report explains. As the global economy shifts toward tighter carbon regulation, companies that delay addressing their Scope 3 emissions could incur substantial financial liabilities, brought on by expanded carbon taxes, emission caps, and compliance penalties that increase operating costs. At the same time, taking steps now allows companies to avoid those added expenses before they become harder to manage.
The study recommends several steps companies should prioritize in order to start this process, from coordinating with suppliers on a plan to reduce emissions, to establishing a dedicated budget to fund business-wide decarbonization initiatives. It also points to the need for clear internal accountability, so that progress can be tracked and enforced, and companies can track whether their efforts are actually reducing emissions. Whatever strategy a company does ultimately employ, the goal should be to move quickly and efficiently, the study concludes.
"Our message to business leaders: Grasp the opportunity to be an early mover and reap the rewards," said Thaler.
