The Polluters in the Mirror: Will Reporting Scope 3 Emissions Save the World?

The logistics industry is at a crossroads when it comes to tracking and reporting on Scope 3 carbon emissions. Cutting emissions across the global supply chain, most agree, would benefit the environment and potentially companies and consumers. But, the value of tracking and reporting on Scope 3 emissions remains murky, and corporate leaders and policymakers need to think carefully about the pathways that involve such a strategy.

Regulators across the United States and Europe already are increasing their calls for more mandatory sustainability reporting requirements, including Scope 3 emissions that result from “assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain.”

California, for instance, recently enacted an emissions-disclosure bill regulating companies with $1 billion or more in annual revenues that do business in the state. The law not only requires those corporations to disclose their carbon emissions by 2026 but to report on emissions generated by their suppliers – Scope 3 – by 2027. The law will directly impact more than 5,300 companies, which now await the details of the requirements that will be developed by the state’s Air Resources Board.

Will such regulations help reduce carbon emissions? And should companies trace and report Scope 3 emissions even if they aren’t required to by law?

Our research and interviews with corporate leaders provided some significant business pros and cons of reporting on Scope 3 emissions.

Pros of reporting on Scope 3 emissions

The idea that “knowledge itself is power” (scientia ipsa potentia est) dates back at least to Sir Francis Bacon, and, as feminist Robin Morgan pointed out, the “hoarding of knowledge or information” can be an “act of tyranny.” So, there’s a philosophical case for sharing information.

On the other hand, there is wisdom in selective silence, especially when sharing information would be counterproductive to the greater good. The Byrds echoed the writer of Ecclesiastes when they sang about “a time to every purpose,” which would include “a time to be silent and a time to speak.”

Here are three reasons leaders should consider speaking up about the details of their company’s Scope 3 emissions:

1. Data measures progress. Accurate data on Scope 3 emissions helps companies track whether they are meeting targets, such as net zero goals, and identify areas for improvement and potential solutions. Mandatory reporting with penalties also can improve the overall data quality and help hold companies accountable.

2. Standards encourage innovation. Reporting on Scope 3 emissions can promote innovations designed to lower emissions, which, in some cases, can also reduce expenses for tracking the data.

One of the most significant innovations in reducing carbon emissions – Honda’s Compound Vortex Controlled Combustion engine (the CVCC) — resulted from increased standards in an amendment to the U.S. Clean Air Act. The innovation added less than $150 to the cost of the company’s new model (the Civic) in 1972, eventually was licensed for use by other major automakers, and launched Honda into an international player in the auto industry.

Companies that report their Scope 3 emissions will no doubt pressure their suppliers to seek innovative solutions to reducing their environmental impact. And even if downstream suppliers don’t innovate, they can still reduce their impact. For instance, an emphasis on Scope 3 emissions can lead to incentives throughout the supply chain for operators to take positive steps like using newer-model trucks that are more fuel efficient and less toxic in their emissions.

3. Reporting builds credibility. Companies that report on Scope 3 emissions position themselves as leaders in environmental stewardship, making it more likely they will play a role in shaping standards. Such was the case for companies like Apple and Patagonia when California crafted its emissions law. Rather than sit on the sidelines, early adaptors can make the case for reducing reporting burdens and making information more readily consumable.

Reporting on Scope 3 emissions also reflects positively on companies that are committed to reducing their environmental impact and makes it more difficult for companies that aren’t making an effort to deny or lie about their own footprint.

Consumers and investors, meanwhile, increasingly demand transparency into a company’s environmental impact. Scott Wiener, author of the California bill, claimed reporting would provide “useful information” to investors who want to make sure companies are true to their marketing claims.

Cons of reporting on Scope 3 emissions

If reporting Scope 3 emissions was a silver bullet for reducing industry’s global environmental impact, there would be little debate over laws like the one passed in California. But the debate rages on, so stakeholders need to contemplate at least three reasons for reconsidering the value of tracking and reporting Scope 3 emissions:

1. It’s hard to collect accurate data. Supply chains are complex, and tracking Scope 3 emissions can be particularly time consuming and expensive, if not impossible.

A finished product can consist of dozens of components sourced from providers worldwide. An automobile is a classic example, but even a can of air (for cleaning your keyboard) has multiple parts from multiple vendors. The California Chamber of Commerce, which opposed the emissions-disclosure law, noted the challenge a frozen-pizza company would face trying to accurately calculate the emissions of a tomato processed into sauce.

“(The law) is about trying to shame companies over inaccurate data, as opposed to generating good public policy,” said Ben Golombek, the chamber’s chief policy officer.

Many companies lack deep insights into their supply chains. And some suppliers, in an effort to protect their sourcing relationships, won’t even reveal their tier 2 or tier 3 suppliers. Even if a corporation can completely trace its sourcing, the accounting becomes complicated because of the potential for double-counting emissions as they cascade through the supply chain.

2. The benefits are unclear. The benefits of reporting are predicated on the notion that disclosure provides information that changes behavior for the better; however, some incentives do just the opposite. When cardiologists were required to report success rates for bypass surgeries, for example, they cherry picked healthier patients, leading to worse outcomes for society. In complex supply chains, where auditing resources are limited, there will be pressure to select suppliers that under-report emissions.

Some influential players in supply chains (like major retailers) have incentives to resist taking on the risks that come with reporting data when so many factors are outside their control. They don’t want to take the hit (with bad PR and investor relations) when tier 3 or lower suppliers cause their emissions scores to drop. And reporting Scope 3 supply chain emissions almost certainly will produce worse scores for the reporting company. Research by Morningstar found that as much as 90% of climate emissions for consumer products come from Scope 3 sources.

3. It’s hard to produce helpful information. Achieving significant reductions requires reining in the most significant polluters, but that’s not industry, or business-to-business transactions—it’s household use of energy to fuel our vehicles and give power to everything from our smartphones to HVAC units. Reductions resulting from more data on Scope 3 emissions would be a comparative drop in the bucket, which makes the cost of tracing emissions through the supply chain less justifiable.

That said, there is value in reporting targeted data that holds corporations responsible for their carbon emissions and helps identify the sources of those emissions. For instance, trucking data can lead to reductions in that industry’s emissions. These data are straightforward to measure and, by scoring freight-moving companies on their emissions, a market for greener freight movers can be created.

By comparison, other Scope 3 emissions are much more difficult to understand. Take product packaging’s impact throughout the supply chain, for example. The relative greenhouse gas emissions between paper and plastic packaging depend critically on several factors that are difficult to measure: where the paper is sourced, how many times the package can be reused, whether the product spoils, etc. Tracking this is costly—and unlikely to significantly change packaging decisions.

Broadly speaking, it is already clear that fossil fuel producing companies have the largest impact on climate. Reporting the minutia of how this production turns into emissions throughout the supply chain is unlikely to significantly change the behaviors of the corporations and consumers to the degree urgently needed to achieve global policy objectives.

When corporate leaders and policymakers consider the details of how Scope 3 emissions should be tracked and reported, it’s important that they keep in mind the costs and benefits of those efforts. There are emissions reductions to be had in the supply chain. Nonetheless, the most significant changes won’t be driven by industry or by reporting scope 3 emissions, but by people in the general population looking in the mirror and owning up to the costs of reducing emissions.

About the authors:

Andrew Balthrop (PhD, Georgia State University) is a research associate within the Supply Chain Management Research Center at the Sam M. Walton College of Business at the University of Arkansas. His research focuses on the interaction between supply chains and public policy.

Alex Scott (PhD, Penn State University) is an associate professor in supply chain management at the Haslam College of Business at the University of Tennessee-Knoxville. His research focuses on transportation sustainability, safety, and public policy.

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