BlackRock’s chief executive Larry Fink has said that the presence of private companies in supply chains creates a “structural problem” for businesses looking to report their Scope 3 emissions.
Private companies’ presence in supply chains makes it harder for businesses to report their ESG risks, BlackRock chief executive Larry Fink told the Oslo Energy Forum, as reported by Bloomberg.
Fink specifically highlighted the difficulties associated with reporting Scope 3 emissions — an area of disclosure that has been receiving increasing attention from regulators.
Scope 1 emissions cover greenhouse gases directly created by a company. Scope 2 emissions are indirect, such as the energy purchased to heat or cool a building. Scope 3 emissions cover those created across a company’s value chain, such as those generated by suppliers.
For many companies, Scope 3 emissions make up more than 70 per cent of their carbon footprint, according to Deloitte.
In the US, the Securities and Exchange Commission proposed last year to mandate the disclosure of Scope 3 emissions from all but smaller companies, if these emissions are material.
Meanwhile, the International Sustainability Standards Board, which has been developing global ESG reporting standards since it was established in 2021, has included Scope 3 emissions as a reporting requirement in its two sets of proposals.
The ISSB convened most recently on February 16, and these standards are expected to be finalised this year.
A structural problem
“Companies are very willing to report [Scope] one and two,” Fink said. “But to report Scope 3, then you were reporting on your supply chains and most of your supply chains are private companies on the supply side.
“And so this is the structural problem we’re facing in society today.”
Carbon accounting platform Persefoni’s global financial services director Luke O’Brien recognised the challenges spelt out by Fink, adding that “it’s not as simple as that”.
“In most applications of the Greenhouse Gas Protocol the use of estimates for Scope 3 is common,” he told Sustainable Views. “It’s hardly perfect, but it’s a critical step in this evolution, and something carefully omitted by many who want to postpone this work.” The Greenhouse Gas Protocol has created accounting standards for measuring carbon emissions.
“To state the obvious, if companies in the most evolved markets were required to disclose their Scope 1 emissions, alongside already mandated financial disclosures, Scope 3 would not be so difficult to calculate,” added O’Brien.
“Larger organisations would simply incorporate this within their own net zero plans, accelerate baselining, and streamline transition planning — and investors could better measure the immediate and long-term financial risk that climate poses to their assets.”
“The challenges that Fink highlights are very real today,” John Wheeler, auditing software company AuditBoard’s senior adviser for risk and technology, told Sustainable Views.
“In most cases, the metrics used by private companies are typically driven by funding requirements such as ESG bonds,” he continued. “However, a wide range of bonds are offered, and [there is] a similar wide range of ESG standards to choose from. The wide-ranging differences between [hundreds of] competing ESG standards and frameworks make it hard to report and compare performance.”
Private companies — specifically mid-market and below-sized companies — currently experience “a capacity and resource gap”, a CDP spokesperson said.
“While a gap presently exists, we expect it to narrow considerably over the next three years as investors and corporations expand their climate and environmental stewardship to include private companies,” the spokesperson added. Last year, more than 18,700 companies responded to the CDP environmental disclosure system, more than 13,000 of which were estimated to be private companies.
But Paul Lee, investment consultancy Redington’s head of stewardship and sustainable investment strategy, said that “the nature of the ownership of the company shouldn’t be a driver of its ability to report”, or the regulatory requirements that it faces on reporting.
“What actually should be the driver of a company’s requirement to report is its footprint into the world” he told Sustainable Views. “A company that has a large carbon footprint should be required to make appropriate carbon disclosures.”