• Suman Raju, Chief Financial Officer at Ivalua


• 11.05.2023 11:45 am
#financialServices

Major financial institutions have made bold pledges to hit net zero targets by 2050, but with limited visibility into their Scope 3 emissions, are they setting themselves up to fail?

Until recently, financial institutions have mostly focused on Scope 1 and 2 emissions from their own operations. But with Scope 3 making up over 75% of total emissions at most organisations, meeting net zero goals without looking at indirect emissions is little more than a pipe dream. The challenge is it’s very difficult to measure Scope 3 emissions.

Financial institutions’ reporting of Scope 3 emissions data is becoming increasingly scrutinised by investors, regulators, stakeholders, and customers alike. So, over the coming months, all eyes will be on firms to check if their net zero plans are anything more than just hot air.

Benchmarking isn’t enough

The Financial Conduct Authority (FCA) has recently criticised ESG benchmark administrators, calling for improvements in the quality of their disclosures and more clarity on their methodologies. In fact, a “Dear CEO” letter from the FCA marks a clamp down on benchmarking firms, with the FCA stating that “all regulated firms making sustainability-related claims must ensure these are clear, fair, and not misleading.”

At the same time, the UK government is pushing for more standardised reporting on ESG for financial institutions to address a lack of consistency. Without a consistent approach to emissions reporting, it’s almost impossible to measure firms against one another and gain a complete picture into the environmental impact of the FS sector. To address this, the government plans to launch a call for evidence on how it can support Scope 3 reporting in the financial sector in its 2023 Green Finance Strategy. 

With increasing scrutiny on ESG reporting and emissions tracking, financial organisations can’t rely on third-party benchmarking services alone to measure their environmental impact and back up green claims. Without granular insight into Scope 3 emissions, firms may even find themselves becoming inadvertent greenwashers if they can’t back up their emissions claims with proof they are reducing all emissions, including those from their suppliers.

To avoid accusations of greenwashing in the future, financial institutions must act now to radically improve visibility and measurement of Scope 3 emissions data. If not, they could find themselves in a world of regulatory and reputational hurt. This is already becoming a reality, with Deutsche Bank facing a $1 trillion greenwashing scandal after misrepresenting a fund’s green credentials in marketing materials.

Procurement holds the key to Scope 3

It’s clear the clock is ticking for financial institutions to improve visibility into Scope 3 emissions. But many are falling behind as they struggle to gain data quality and visibility into their suppliers – and by extension – visibility into Scope 3 emissions data. Scope 3 emissions data is not always provided upfront. This is because data is often stored in silos making it difficult to assess, or there may be poor quality or duplicated data that creates inaccuracies in reporting.

However, there could be an unlikely hero for financial institutions to lean on and bring visibility to indirect emissions. Enter Procurement teams.

Procurement has always acted as the gateway to suppliers, having an unmatched position to gather supplier data at a granular level, and ensure that organisations across the entire supply chain are being transparent about their environmental impact.

With recent advances in cloud-based smart procurement technology, financial organisations can capture emissions data from suppliers and other sources downstream more accurately to track the environmental impact of purchases. This data is cleaned up and brought together into a single view, so organisations can better understand Scope 3 emissions and identify areas for improvement.

This level of insight will help financial organisations to continuously assess their environmental impact, compare it against their public goals, and then whittle out the worst-performing suppliers to make sure they are on track.

Organisations are then empowered to identify suppliers with a particularly large environmental impact and have the tools needed to either collaborate with the supplier on improvements. Or, swap them out altogether for a greener supplier.

Engaging in greener sourcing practices also means organisations can select suppliers based on Scope 3 emissions. This makes greener practices a competitive advantage for suppliers in the long run, giving an incentive to reduce emissions to win contracts. This has the potential to create a huge knock-on effect across global supply chains that makes clear business sense, but also will really make a difference to the environment.

The days of green “grey areas” are over

The walls are closing in for organisations who can’t provide clear, consistent, and accurate insights into emissions across their entire value chain.

On the other hand, the financial institutions who do achieve real-time insights into their own environmental impact will be able to allay any greenwashing concerns, creating actionable ESG strategies that ensure they remain on top of ever-changing regulatory demands.

This level of insight into emissions will help firms to set realistic and achievable net zero goals, reducing the risk of non-compliance, but it will also give firms the edge over less green competitors and help drive change across the entire supply chain.