With Scope 3 carbon emissions not specified in the UK net zero financial centre plans, climate finance experts have questioned the strength of the government's climate ambitions.
On finance day at COP26, chancellor Rishi Sunak announced the UK would be the first net-zero financial centre. The plans require all UK financial services organisations to set out by 2023 their pathways to reaching net zero carbon emissions by 2050. Whether or not organisations then choose to pursue that path, however, has been left on a voluntary basis.
Although the move has been broadly applauded, it was also met with scepticism over how effective a voluntary scheme could be. The main questions lie with the implementation of the scheme, and specifically whether each company’s transition to net zero should include Scope 3 emissions.
“The question is what that means in practice,” said Douglas Johnston, climate change and sustainability services partner at EY. “We’re seeing a lot of net zero plans come out, but they’re often all about Scopes 1 and 2.”
Carbon emissions are usually split into three scopes. Scope 1 emissions are those owned and controlled by the company, while Scope 2 includes emissions from electricity use. Scope 3 covers all other emissions, including supply chain and consumer use of any products created.
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“On Scopes 1 and 2 only, the UK economy might achieve net-zero emissions sooner than 2050,” said Johnston. “But what about the emissions in all those emerging markets that occurred to enable us to achieve net zero?”
Down the supply chain
Sources also say that the lack of a specific request on Scope 3 emissions will affect how governments prepare their Nationally Determined Contribution (NDC) plans and how corporates comply with the new reporting requirements.
“It’s a massive gap,” said Stephanie Wray, founder of Nature Positive, a climate reporting and risk management consultancy. “By ignoring Scope 3 emissions, we're pushing this reporting burden and the responsibility for it down the supply chain, to people who haven't got the resources to deal with it and aren't going to report on it.”
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The solution to this, according to Wray, is more regulation and better guidance to encourage and enable corporates to make more robust transition plans.
“We need companies to step up and take responsibility for their own impacts,” she added. “They need to be responsible for the raw materials they use and for what their suppliers do to allow them to carry out their business.”
Long philosophical debate
However, the size of Scope 3 emissions makes reporting difficult, and opinions vary on whether they should be included in companies’ pathway to net zero plans.
“Working out where a particular company’s emissions and responsibility end where another’s begin is a long philosophical debate,” said Silke Goldberg, global head of ESG at Herbert Smith Freehills. “Where you draw the line between Scope 1, 2 and 3 emissions can have very different outcomes and is important. In this case, I support the idea that if companies set goals they need to be measurable and within their control, rather than in consumers’ control.”
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Looking ahead
With financial services firms now required to set out a pathway to net zero, it will be interesting to watch the different approaches they take. At the moment, many companies branding themselves as net zero are heavily reliant on offsetting as a means to maintain the label.
Last week, the Science-Based Targets Initiatives (SBTIs), which provides of one of the most widely used net-zero frameworks, launched the world’s first standard for corporate net zero emissions, which only allows companies to offset 5%-10% of their emissions. This much more stringent approach could be picked up by regulators as they continue to flesh out the detail of their plans.
Following the launch of the International Sustainability Standards Board (ISSB) during COP26’s finance day on Wednesday, more clarity will likely emerge on what is required from corporates in their obligation to create a pathway to net zero.
