Scope 3 emissions – indirect emissions that are not produced by a company but by independent members along its value chain – are increasingly being seen as the key to achieving decarbonisation in Asia and worldwide. During the BNP Paribas Sustainable Future Forum in Hong Kong and Singapore, the Transaction Banking team shared the results of a recent ESG survey commissioned by the Bank, which interviewed over 200 C-suite and senior executives across geographies and industries in Asia Pacific and discussed strategies in addressing Scope 3 emissions.
Scope 3 emissions – an important challenge
Cynthia Tchikoltsoff, Head of Global Trade Solutions APAC at BNP Paribas, noted that Scope 3 emissions typically represent 70% to 90% of corporate greenhouse gas (GHG) emissions. “But in reality, less than 15% of the companies we have surveyed are actively working on Scope 3. It is the most difficult part of GHG emissions to tackle.”
Eric Tran, Head of Sustainability Transaction Banking at BNP Paribas, used the example of the textile industry to demonstrate the situation, where as much as 97% of the emissions for multinational corporations can be in the upstream supply chain, with GHG emissions and waste resulting from outdated manufacturing practices and reliance on non-renewable sources for energy.
“The funding gap to modernise the supply chain in the textile and apparel sector has been estimated at USD1 trillion,” he explained. “Investments are fragmented, and manufacturing suppliers may prioritise other areas in light of uncertainty on return on investment.”
Change lies ahead
However, corporates are making the change, and increasing regulation will fuel this trend. Momentum starts in the European Union, where the Corporate Sustainability Reporting Directive (CSRD) requires companies to report on Scope 3 emissions. While this is an EU directive, it has considerable impacts on other countries, including those in Asia: any non-EU company that has generated a net turnover exceeding EUR150 million in the EU in each of the last two consecutive financial years, or has at least one large or listed subsidiary on regulated markets in the EU with more than EUR40 million net turnover, is expected to progressively comply. So too are non-EU SMEs with debt or equity securities listed on a regulated market in the EU.
These reporting obligations, which will gradually kick in from 2024 to 2029, cast a wide net in Asia, with similar regulations being developed in the region. Singapore, Japan and Hong Kong, among other markets, are adopting the International Sustainability Standards Board (ISSB) principles to monitor their own climate-related risk exposure.
Driving ESG progress in a supply chain
How can progress be achieved? Leading corporates offer advice based on their experience. Schneider Electric has been reporting on sustainability for 20 years, with a comprehensive set of initiatives designed to reach net zero in operations by 2030 and the value chain by 2050. In 2021, the company developed a programme focused on Scope 3, involving the top 1,000 of its suppliers, which together generate more than 80% of CO2 emissions in Schneider Electric’s chain. As of Q3 2024, the company has already reached 36% decarbonisation of the targeted Scope 3 suppliers, putting it on track for the target of 50% by end of 2025.
The Group has managed this in part through a nuanced understanding of the realities facing suppliers. “Companies in general have different challenges in different stages,” said Alexandru Popa, Associate Principal, Sustainability Business Division at Schneider Electric. For those just starting on their sustainability journey, challenges may be around compliance and primary data collection. More advanced companies will have identified targets and created roadmaps, and for them the main challenge is “actually onboarding suppliers, getting their buy-in,” stated Popa. “It’s not very easy. Partnership and clear communication are key,” he added.
“The most advanced companies” Popa said, have engaged their suppliers and are ready to act on decarbonisation, “but there is a lot of noise out there and some don’t know where to start. To help those suppliers, it is important to build a robust programme with a very knowledgeable procurement team to assist them.”
A two-pronged approach
At Singapore-based real estate company CapitaLand, Scope 3 divides into 15 underlying categories, but Vinamra Srivastava, CapitaLand’s Chief Sustainability & Sustainable Investments Officer, explained that one should be clear on priorities.
He advises a “two-layer metric” in setting these priorities. “You cannot try to address all 15 categories. You want to see impact, and you also want to consider the feasibility of execution. Sometimes you do need quick wins to get the momentum going.” He also advises moving as quickly as possible from a spend-based analysis to a product carbon analysis.
He has found good results in “a combination of incentives and penalising measures in your procurement guidelines.” This involves insisting on particular standards within those guidelines, and implementing supply chain financing incentives to support suppliers who make the correct effort in their decarbonisation initiatives.
Corporates said several aspects help them in managing their Scope 3 emissions and assisting their supply chains to decarbonise. These include standardised supply chain practices, training suppliers, simplifying data reporting for SMEs, seeking transparency in labour practices at suppliers, and developing onshore facilities that reduce the carbon footprint associated with transporting materials.
In turn, these corporates rely on financial institutions and regulators to facilitate clean energy access to SMEs in emerging markets. “Renewable energy investments in certain markets may require greater regulatory clarity and coordination to reach their full potential,” said Anne-Laure Descours, Chief Sourcing Officer at PUMA Group.
Embrace partnership
Partnership is key in addressing supply chain sustainability. Scope 3 is “a very complex matter that requires a lot of collaboration within companies and across organisations, with financial institutions and suppliers,” outlined Tchikoltsoff.
❝ [Scope 3] is a very complex matter that requires a lot of collaboration within companies and across organisations, with financial institutions and suppliers. ❞
Descours at PUMA believes the key to Scope 3 sustainability is “collaboration, partnership and transparency. Nobody can do it alone: this is such a large capex investment that it has to be open.” For example, PUMA ensures that it promises long-term business and commitment to its suppliers so that they feel safe to make major investments in sustainability. “If you don’t give them the safety net, they cannot invest.” PUMA’s partnerships around sustainable working capital for suppliers go back many years: one such arrangement with the International Finance Corporation (IFC) dates from 2016.
Descours explained, “Banks can help companies to create facilities that encourage decarbonisation in the supply chain, such as financing at lower rates if certain sustainability-related KPIs are achieved. That incentivises the right kind of behaviour.”
Descours also called upon banks to support local governments “to provide funding to give suppliers access to renewable energy.” Local government support is widely mentioned by corporates. By promoting corporate disclosure by SMEs, for example, these governments can help solve the Scope 3 issue.
One initiative by BNP Paribas seeks to enable transparency in supply chains by scaling disclosure, working with ESG agencies such as CDP to engage clients and integrate incentives tied to progress. “We have more than 100 suppliers who have been disclosing for the first time because of this system,” says Tran. This could lead to lower financing costs, which can help offset some of the costs of disclosure and verification.
Companies have a further incentive to be a leader on Scope 3, with ESG-conscious funds reallocating investment towards companies meeting higher GHG emissions standards, affecting market valuations.
“ESG issues on supply chains are embedded in the whole process of our investment. Supply chain practices contribute up to 16% in the ESG scoring methodology,” said Crystal Geng, ESG Research Asia Lead at BNP Paribas Asset Management. This includes a comprehensive screening process for issues including human rights, labour standards and environmental considerations; engagement efforts to improve the upstream and downstream supply chain in certain industries; and investing more in companies with green procurement policies and supplier standards. Therefore, a climate-resilient and equitable supply chain should be not only sustainable but a driver of market performance.
❝ ESG issues on supply chains are embedded in the whole process of our investment. Supply chain practices contribute up to 16% in the ESG scoring methodology. ❞
