ZEUS: The supply chain problem's silver climate lining
As companies rush to shore up supply chains post-Covid, a climate priority is surprisingly taking hold.
(David Callaway is founder and Editor-in-Chief of Callaway Climate Insights. He is the former president of the World Editors Forum, Editor-in-Chief of USA Today and MarketWatch, and CEO of TheStreet Inc.)
SAN FRANCISCO (Callaway Climate Insights) — Tucked into a press release by shipping giant Maersk last month, about building eight new ships that can run on green methanol, was a surprising nugget about the global supply chain. The Danish company had made the investment in response to demands from its shipping clients, many of them tech companies.
The companies, including Amazon (AMZN) and Microsoft (MSFT), had made their own commitments to clean up their supply chains, and were now leaning on their vendors. With global shipping responsible for about 3% of the world’s GHG emissions, the Maersk methanol move is expected to lead to similar initiatives from competitors.
The cleaning up of supply chains is known in climate jargon as Scope 3 emissions. These are emissions that are beyond the direct control of a company, as opposed to its business travel budget (Scope 1) or emissions from the forms of electricity it uses (Scope 2). Scope 3 are the emissions from its vendors and supply chains. And they are quickly becoming a new front in both how companies are moving to become greener, but more importantly in how their climate commitments are measured.
By any estimate, government demands for everyone to fight global warming have been largely ignored to date by the business sector. More successful have been shareholder demands, led by the large institutional investors, such as the California Public Employees Retirement System (CalPERS) or BlackRock (BLK) Asset Management.
But direct pressure from one’s clients has always been a vague and difficult way to measure business. After all, everyone wants their shipping and delivery chains to be as inexpensive as possible. Shipping over flying, for example. But now that some of the larger companies are pressuring their vendors, investors can begin to measure commitment based on their Scope 3 metrics.
Clorox Co. (CLX), for example, announced this week it would reduce its Scope 3 emissions by 25%, as part of a bigger plan to reduce emissions by 50% by the end of the decade.
A report by the World Wildlife Fund this summer about corporate climate commitments said while 60% of the Fortune 500 companies have made some sort of climate commitment, that number falls to less than 20% when measuring indirect emissions.
In the global tug and thrust of daily finance, it is business-to-business dealings that drive momentum. Inflation, energy, and as we now know, global pandemics, dictate pricing and performance all the way down the line. As more businesses begin to show real commitment through Scope 3 reductions, that commitment gets passed down the line, like it or not, by some vendors.
In a summer where dramatic climate disasters around the world have led to nothing but stagnation and geopolitical finger-pointing by governments, shareholders and business managers need to step up to fill the void. Investors sifting through the confusing metrics of environmental, social and governance reporting by companies will do well to seize on Scope 3 emissions as a priority short-term target.
Not only will that help companies — and funds — avoid the greenwashing accusations, and in some cases now regulatory investigations into whether they are living up to their climate commitments, it could provide powerful new ways for companies to push their emission-reduction goals from vendor to customer.
Watch closely for a surge in Scope 3 commitments in coming months, and for finance to leap on them as it struggles to make an investment case for fighting global warming.