India's elusive net zero target: Reducing Scope 3 emissions by companies may be key

The climate crisis is real. Countries, cities and companies have commenced work towards abating greenhouse gases (GHG), yet the past eight years (2015 to 2022) are on track to be the eight warmest on record, fuelled by ever-rising greenhouse gas concentrations and accumulated heat (per the WMO Provisional State of the Global Climate in 2022 report). This has resulted in extreme heat waves, drought and devastating floods, affecting millions and costing billions this year.

Companies have been adhering to the protocols for effectively measuring their GHG emissions, but that’s mostly restricted to Scope 1 (direct emissions) and Scope 2 (emissions from direct purchases of energy). The indirect emissions, which occur in activities outside the boundary of an organisation—such as vendors, suppliers, etc., which are external entities but are inextricably part of its value chain—are classified under Scope 3. Tellingly, Scope 3 emissions account for about 75 per cent of the total industrial carbon footprint, and are often neglected.

Scope 3 emissions are more relevant as a company-level measure than at the country level. And collective effort at the companies’ level can contribute in a big way towards achieving the country’s net zero goal. “When sectors like oil & gas and auto focus on Scope 3, it captures the real emissions challenge from those industries that are in the in-use space,” says Naveen Unni, Partner and India lead of Sustainability at McKinsey & Company. “When large organisations focus on Scope 3 emissions, they work with SMEs (suppliers/contractors) in helping them decarbonise, which will accelerate decarbonisation further and help identify decarbonisation innovations in hard-to-abate sectors.”

Further, Unni explains that what is Scope 3 emission for one company (say, a large organisation) may be Scope 1 or Scope 2 for its vendor or partner. For instance, for an auto manufacturer, emissions in procured steel is Scope 3, but for the steel company, the emissions in manufacturing the steel is Scope 1 or 2. So, the process of addressing Scope 3 emissions could actually lead to a fall in the other emissions, too. Sounds deceptively simple, but it is actually highly complex, largely because many of the partners and vendors simply don’t understand Scope 3 emissions and what exactly they need to do. Plus, data on Scope 3 is maddeningly hard to come by.

“There are challenges around collecting accurate data on Scope 3 emissions due to the large supplier base of organisations dispersed across different geographies. This makes it difficult to set an accurate baseline and measure progress,” explains Anvesha Thakker, Partner & Lead for Renewable Energy at KPMG in India. “The organisational structure is not there in many companies to collect data on and address Scope 3 emissions, and functions from all parts of a company need to be involved in this.”

meeting the emissions challenge

Several large companies, therefore, are taking the lead in carrying along their ecosystem on their journey. For instance, French multinational Schneider Electric is present in over 100 countries. For Schneider Electric to become net zero in the complete value chain by 2050, reduction of Scope 3 emissions is critical. “To make strong strides in this, we have launched The Zero Carbon Project with our top 1,000 suppliers to reduce their carbon emissions by 50 per cent by 2025—notably more than 40 out of these are based in India,” says Venkat Garimella, Vice President for Corporate Strategy, Sustainability and CSR at Schneider Electric India, adding that 70 per cent of these suppliers are beginners in decarbonisation, and Schneider supports their journey through capacity and community building, and through its own solutions.

In India, natural resources conglomerate Vedanta, which is into extracting minerals, oil and gas, among others, has started reporting Scope 3 emissions two years in advance of its set target. “We have started engagement with our key suppliers to start discussing supply chain sustainability issues and have sustainability criteria defined in our procurement framework [such as] safety performance, child labour, energy efficiency etc., and these will be strengthened to accommodate emissions-related work,” says a company spokesperson.

Under the popular voluntary reporting framework CDP (a not-for-profit global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts), responding companies reported total carbon equivalent emissions of about 1.2 billion tonnes in 2021, an increase of 39 per cent compared to 2020. This was primarily due to an increase in the number of CDP responding companies in 2021 (up from 67 in 2020 to 85 in 2021). As a result, the Scope 1 carbon emissions increased by 1 per cent to 686 million MtCO2e (metric tonnes of carbon dioxide equivalent) in 2021 while Scope 2 rose by 34 per cent to 30 million MtCO2e. Scope 3, on the other hand, increased by a whopping 249 per cent to 440 MtCO2e. Scope 1 constituted 59 per cent of the total overall emissions in 2021 in comparison with 82 per cent in 2020, as several companies have shifted this to their supply chains by adopting more outsourcing as a policy. This also resulted in the rise of Scope 3 emissions’ share from 15 per cent in 2020 to 38 per cent in 2021. The share of Scope 2 emissions remained flat at 3 per cent.

And within this reported data by the 85 Indian companies in 2021, the hard-to-abate sectors dominate Scope 3 emissions. The largest contribution was from oil and gas, which stood at a significant 64 per cent, followed by transportation equipment at 20 per cent, metal smelting, refining and forming at 7 per cent, and cement and concrete at 4 per cent.

categorising scope 3 emissions

Numerous activities contribute to Scope 3 emissions depending upon the nature of an organisation, but the top ones reported in 2021 included business travel, employee commute, upstream transportation and distribution, purchased goods and services, fuel- and energy-related activities, and waste generated in operations, among others, which companies are actively working towards.

Commencing its net zero journey long ago and achieving carbon neutrality in 2020, IT major Infosys’s Scope 3 emissions mainly include emissions related to business travel and employee commute, apart from capital goods and T&D losses. The company’s strategy for reducing Scope 3 emissions includes a hybrid working model and optimising business travel through enabling seamless digital collaboration. “Apart from this, our strategy also includes promoting carpooling, use of public transport, promoting electric vehicles (EVs) among employees, and transition to EVs for our owned vehicles and hired cabs. Increasing the share of renewable energy in the consumption mix and adopting a life-cycle approach for capital goods also contributes to the reduction in our Scope 3 emissions,” explains Nilanjan Roy, CFO of Infosys.

But no one strategy fits all. While the task at hand for a company in the services industry looks difficult, measuring and abating Scope 3 for those in manufacturing is even more challenging due to their large and complicated supply chains.

Kolkata-headquartered ITC, which has a diversified presence across industries such as FMCG, hotels, software, packaging, paperboards, speciality papers and agribusiness, while working extensively on Scope 1 and 2 emissions over the years, has undertaken a detailed exercise to estimate its Scope 3 emissions with the help of external subject matter experts. ITC has implemented several interventions to address Scope 3 emissions across its agri value chains, logistics infrastructure and plastic packaging. To reduce its carbon footprint across the agri value chains, the company works closely with farmers to promote climate-resilient practices such as zero tillage, soil conservation measures, balanced crop nutrition, drip irrigation and large-scale watershed development programmes.

“We have implemented a Climate-Smart Village initiative, which is aimed at building climate resilience of farmers, and has covered over 800,000 acres across 2,500 villages till date. The initiative has resulted in reduction of GHG emissions by up to 66 per cent while enhancing net farmer income by 93 per cent for soybean crop in Madhya Pradesh,” explains Madhulika Sharma, Chief Sustainability Officer of ITC.

As Scope 3 emissions happen along the value chain, an organisation working towards sustainable business practices should also ensure the adoption of sustainability measures by their value chain partners. “The value chain partners should be incentivised for adopting these measures, [and] they should also carry a risk to lose out on a potential business opportunity in the absence of these measures,” says Sankar Chakraborti, Chairman of ESGrisk.ai & Group CEO of Acuité.

British multinational consumer goods company Unilever has set ambitious science-based targets. It is working to eliminate carbon emissions from its operations by 2030 and reach net zero emissions across the value chain by 2039 (from material to the point of sale). Its Indian arm, Hindustan Unilever Limited (HUL), has commenced work on Scope 3 emissions, largely coming from materials used and logistics. HUL has identified a subset of suppliers whose materials have the highest impact on climate. Under its ‘Unilever Climate Programme’, HUL will bring together its top suppliers and will offer hands-on guidance and access to tools to accelerate their climate journey by helping them measure, report and reduce their emissions. “We are exploring cutting-edge technology to reduce material carbon footprint at the suppliers’ end, such as carbon capture technology,” says an HUL spokesperson.

long road ahead

Industry experts elucidate that Scope 3 is in its early stages globally. It is where Scope 1 and Scope 2 were five years ago. And while companies have started focussing on Scope 1 and Scope 2, there is a dire need to push for Scope 3. However, the silver lining is that the biggest companies are beginning to measure and set their aspirations. Even the most developed countries and sectors are beginning to ask for Scope 3 targets and actions.

“Indian companies are also beginning to do this, but more proactively where customers or regulators in their key export markets are pushing for this. Over the next few years, we expect the Scope 3 emission measurement, aspiration and action planning to become more expected than an exception,” adds Unni of McKinsey.

But the reality is that as companies start looking deeply at Scope 3, its full complexity becomes apparent, especially if you look at sustainable materials, sustainable transportation and logistics, and more. For each element to become genuinely sustainable requires a lot of effort, and if achieved, that’s when we will start moving towards decarbonisation. But with just six years and a little more remaining to limit global warming to 1.5 degrees, the world is in a climate emergency. Robust proactive action towards Scope 3 could possibly help in averting the climate catastrophe.

@nidhisingal