One of the best levers to nudge markets into taking net zero targets seriously is using reverse factoring or supply chain finance, as it is also known, to promote those companies that audit their carbon gas emissions, and have a plan in place to eventually be carbon neutral.
Greenhouse Gas (GHG) Protocol
The Greenhouse Gas Protocol has become the most widely adopted system for measuring greenhouse gas emissions. It is widely used in conjunction with ESG guidelines in attempt to make business sustainable, environmentally friendly and socially aware.
There are three ‘scopes’ in the Greenhouse Protocol. Scope One refers to the carbon emissions directly generated from a company’s vehicles and heating systems that use gas. Scope Two refers to the electricity used by a company in its offices, factories and warehouses. These first two bands of energy consumption are easily measured for carbon emissions. A company has more leeway to make reductions to carbon emissions in these two scopes: they can electrify their fleet of vehicles, use solar panels and choose energy suppliers that use renewables.
Scope Three is a far wider and harder to measure source of greenhouse gas emissions. It covers all the indirect ways that a company’s activity contributes to greenhouse emissions. This could be the emissions created by suppliers making materials. It could be the emissions produced by the product itself (namely a petrol engine car could be made with relatively few emissions, but the same could not be said about driving the car). There is also the issue of the carbon involved in disposal and recycling of a product. It is a challenge for a company wanting to audit its scope three emissions to fully capture the carbon costs of a company’s activity in the markets.
Indeed, the UN has stated that scope three emissions make up for 70% of a company’s carbon footprint. With the implication being that if governments are serious about restricting global climate rises to 1.5 degrees Celsius above pre-industrial levels (Paris Agreement 2016), and to reach net zero by 2050 then tackling scope three is crucial.
Implications
Supply chains bring together numerous SMEs and bigger companies and corporations across national borders to drive such key industries as food, car manufacture, technology, retail and construction. Fast-moving consumer-goods (FMCG) from takeaway coffee to sports attire all rely on supply chains. Factoring companies that prioritise supply chains that take quantifiable steps to reduce scope one and scope two emissions is a step in the right direction. Whole financing ecosystems have developed that deal exclusively with companies trying to reduce their greenhouse gas emissions. The key idea is that money flow can be used to finance environmental initiatives.
Less widely discussed is that consumer mindsets need to be challenged. Brands are frequently pulled up by the authorities for greenwashing (see an article from the Guardian newspaper recently). The notion that a company just has to be seen to be doing the right thing in order to make the world a healthier place is, of course, nonsense. The harder conversation to be had by society is about changing consumer habits: better than recycling disposable coffee cups is simply to not make them. Better than electric cars are integrated mass public transit systems. Better than airports using carbon off-setting schemes is for less commercial flights. Mankind is looking for ingenious ways to have their cake and eat it. Scope three of the Greenhouse Gas Protocol puts this ingenuity to allow ‘green’ consumption under the spotlight.
