The ESG Show Episode 11: Measurement of ESG and Scopes 1, 2 and 3
Host: Michael Baxter, Co-Founder and Editor-in-Chief at Techopian
Guests: Ellen Williams - Director of Advisory & ESG Services at Orion Global Solutions
Giorgio Castro - Consultant at GeoSyntec
Catarina Esteves - Director of Business Development at Updapt
Environmental, Social, and Governance (ESG) criteria have become pivotal in assessing the sustainability and ethical impact of businesses. Measuring a company’s ESG performance involves quantifying various environmental, social, and governance factors to understand its overall impact on society and the planet.
A key aspect of environmental measurement within ESG is understanding and reporting greenhouse gas (GHG) emissions, categorized into Scopes 1, 2, and 3. These scopes help companies determine their direct and indirect emissions to improve transparency and accountability.
ESG Measurement Breakdown
Environmental (E): This measures a company’s impact on the environment, such as energy consumption, waste management, and pollution. A significant aspect of this category is a company's carbon footprint, typically assessed through GHG emissions.
Social (S): This category evaluates the company's relationship with its employees, suppliers, and community. It involves factors like labor practices, diversity, and human rights.
Governance (G): Governance refers to how a company is run, including its leadership structure, ethics, compliance with laws, and shareholder rights.
Greenhouse Gas (GHG) Emissions Measurement: Scope 1, 2, and 3
Measuring environmental impact within ESG frameworks requires understanding a company’s GHG emissions, which are categorized into three scopes by the Greenhouse Gas Protocol:
1. Scope 1: Direct Emissions
Scope 1 emissions are direct GHG emissions from sources that a company owns or controls. These include fuel combustion (like gas burned in a company’s boilers or vehicles) and any other on-site emissions. For example, a manufacturing plant’s direct emissions from burning coal would fall under Scope 1. These emissions are the easiest to measure and track as they result from direct business activities.
2. Scope 2: Indirect Emissions from Energy
Scope 2 emissions are indirect GHG emissions from purchased electricity, steam, heating, and cooling. Though the company doesn’t directly produce these emissions, they are a result of the energy it consumes. Measuring Scope 2 emissions requires accounting for the carbon footprint of the energy sources used by the company’s facilities. For example, a business that buys electricity from a coal-powered utility would report the emissions from the electricity it consumes as Scope 2.
3. Scope 3: Other Indirect Emissions
Scope 3 emissions are the most complex to measure as they encompass all other indirect emissions that occur in a company’s value chain. This includes emissions from the production of purchased goods and services, transportation, waste disposal, employee commuting, and even customer use of a company's products. Scope 3 is often the largest category of emissions for many companies. For example, a smartphone manufacturer would need to account for emissions from the mining of raw materials, the manufacturing process at suppliers’ factories, and the shipping of the products worldwide.
Importance of Measuring ESG and Scopes
Regulatory Compliance: Increasingly, governments and regulatory bodies require companies to disclose their ESG practices, particularly carbon emissions. Accurate reporting of Scopes 1, 2, and 3 ensures compliance with sustainability mandates.
Investor Relations: Investors are increasingly favoring companies with strong ESG metrics, as they are seen as more sustainable, ethical, and better long-term investments.
Risk Management: Measuring ESG, including all three scopes of emissions, allows companies to identify risks within their operations and supply chains, leading to better risk mitigation strategies.
Public Image: A company’s reputation is increasingly tied to its environmental and social performance. Transparent reporting of ESG metrics enhances credibility and trust with consumers and stakeholders.
Challenges in Measurement
Scope 1 and 2 emissions are relatively straightforward to measure because they involve direct business activities or purchased energy. However, Scope 3 emissions present significant challenges due to their breadth. Tracking emissions throughout a company’s value chain often requires cooperation with suppliers, data-sharing agreements, and advanced tracking technologies. Despite these challenges, many businesses are working toward comprehensive Scope 3 reporting, as it often constitutes the bulk of their carbon footprint.
The measurement of ESG and the classification of GHG emissions into Scopes 1, 2, and 3 are fundamental in understanding a company's impact on the environment. Companies that effectively measure and report on their ESG metrics can better manage risks, improve compliance, and boost their reputation in the eyes of consumers and investors alike. As the world moves towards a more sustainable future, accurate ESG measurement will continue to be a key driver for both corporate responsibility and profitability.
Keep in mind ESG is still in the “works in a vacuum” phase and should be discussed, vetted and challenged until more concrete rules and regulations are finalized.
ESG is a very big area and is not without its critics. With greenwashing, capitalism and the argument of transparency and authenticity gaining traction it is imperative right now to break down these barriers and correct misinformation about ESG.
The ESG show aims to promote greater understanding of ESG issues and is the home of interesting and thought provoking discussions on ESG.
Powered by Techopian Limited and hosted by Co-Founder and public speaker, Michael Baxter to fly the ESG flag and speak openly about the positives and drawbacks around ESG and the use of technology in ESG strategy.
An ESG is not just a nice-to-have, it is absolutely essential to businesses now to sustain business longevity, attract sustainable funding and reduce the impacts of climate change.
Join The ESG Show every Wednesday for free to meet with various sustainability and diversity specialists and investors and Michael to discuss topical subjects which relate to ESG and debate the responsible use of technology in implementing ESG strategies.
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The ESG Show Episode 11: Measurement of ESG and Scopes 1, 2 and 3