2016 ET CARBON RANKINGS REPORT

UNDERSTANDING THE ET CARBON RANKINGS
21
THE IMPORTANCE OF SCOPE 3
(VALUE CHAIN) EMISSIONS
Scope 3 (value chain) emissions represent
emissions over which the company has
influence but not control, ranging from
production and transportation of raw
materials to the end use of sold products by
a company, or business travel. They are of
critical importance to investors because they
typically make up 75% of a company’s carbon
footprint and therefore reveal their exposure
to increased costs across their value chain.
Government regulation, the development
of low-carbon technologies and consumer
demand are among factors which are
incentivising low-carbon business models.
This affects companies in all sectors but the
impact of these factors is easiest to see in
high-carbon sectors such as the automobile
and fossil fuel industries.
Scope 3 Materiality: Automotive sector
Automotive companies with higher Scope
3 emissions are exposed to market risks
as consumer preference and government
support switch to lower and zero emissions
vehicles. 22 Recent scandals, such as those
involving VW and Mitsubishi Motors, indicate
how tightening emissions regulations and
enforcement of existing rules can lead to
rapid shareholder value destruction.
Emissions rules are tightening across all G20
countries and more regulators may follow
the US Department of Justice in penalising
misconduct. The world’s largest automotive
manufacturers must be ready to address the
environmental and human health impacts
of excessive air pollution from their product,
including carbon emissions. 23
Scope 3 Materiality: Oil, Gas and Coal sector
Global action to keep climate change below
2 °C threatens the business model of oil, gas
and coal companies. Mark Carney, Governor
of the Bank of England, has warned that vast
reserves could become unburnable stranded
assets, threatening investors with huge losses.
However, companies like Exxon can appear
carbon-efficient if judged solely on Scope 1
and 2 emissions. This is particularly true for
companies that have high revenues and that
are relatively carbon-efficient in their process
for extracting and distributing fossil fuels.
The true impact of a fossil-fuel company is
in the use of the products it sells (Scope 3
category 11). 24 Including Scope 3 emissions
is essential to understanding the carbon
efficiency of a company such as Exxon and its
exposure to carbon risk. Furthermore, a drop
in demand for fossil fuels across the economy
will directly affect companies in the supply
chain, so understanding the full extent of a
company’s carbon exposure throughout the
value chain is key to understanding the risk.
Figures 9 and 10 confirm previous analysis by
ET Index Research and ACCA (the Association
of Chartered Certified Accountants), finding
that Scope 3 emissions typically account for at
least 75% of a company’s carbon footprint. 25
The data shows that in the relatively small
sample of companies which have disclosed
each of the 15 Scope 3 categories, these
emissions account for 80% of the total
carbon footprint. Across the larger sample
of companies that have disclosed at least 10
Scope 3 categories, that number drops to
76%.
2016 CARBON RANKINGS REPORT
ET INDEX RESEARCH