With the UN Climate Conference (COP26) in Glasgow starting this weekend, nations face intense pressure to demonstrate they are living up to commitments made in the Paris Agreement and to set more ambitious targets for reducing greenhouse gas (GHG) emissions.
For vehicle manufacturers, this could increase scrutiny on how they are recording, monitoring and managing emissions throughout their value chain.
The challenge of measuring Scope 3 emissions in automotive
Businesses must only monitor the emissions that they directly control, such as emissions resulting from their own business activities (Scope 1) and those that result from the electricity they buy (Scope 2) – for now.
However, in recent years companies have come under increasing pressure to also account for GHG emissions throughout their value chain (including upstream and downstream activities) - classed as Scope 3 emissions. With COP26 and its aftermath likely to dominate the global political agenda for weeks and months to come, expect this pressure to ramp up even further.
For vehicle manufacturers, this presents some major challenges.
The first is the sheer volume of emissions that fall under Scope 3. For most industries, Scope 3 emissions make up a large majority of total value chain emissions, but this is particularly true for the automotive industry, where downstream activities include all the miles clocked up by every vehicle sold. Although actual use of a vehicle is only one of 15 categories within Scope 3 emissions, we find that it can account for up to 70% of the total Scope 3 emissions.
Some industry figures estimate that Scope 3 emissions make up more than 80% of total GHG emissions in the automotive sector, although for individual manufacturers, the figure is often even higher – indeed our research suggests the figure to be more like 98-99%.
Understandably, monitoring and measuring emissions across so many different categories of upstream and downstream activity can be challenging, which is one of the reasons reporting of Scope 3 emissions lags behind other types of emission. A survey of 300 US companies earlier this year found many only reported certain categories of Scope 3 emission (such as business travel), while around one-quarter didn’t report any. This is not dissimilar to our own findings, with most automotive companies sharing simply a high-level figure, if any.
Looking to the future, how can companies remain current, competitive, and compliant in a fast-changing environment? Through better monitoring, measuring and management of their Scope 3 emissions.
- Assess – use industry averages and estimates to identify current performance against industry standards. Many automotive companies that do report Scope 3 emissions rely on estimates, such as Daimler, which calculates the CO2 emissions of its cars on the basis that each travels an average of 15,000 kilometres a year for ten years.
- Prioritise – focus on categories of upstream and downstream activity where you can exert greatest influence (e.g. procurement) and seek opportunities for quick wins. Support suppliers’ transition to net zero. Reducing their own Scope 1 and 2 emissions will help offset your Scope 3 emissions. Ultimately, success in managing emissions, as in so many areas of business, comes down to effective control of the controllables.
- Negotiate and Monitor – track performance against agreed targets, whether based on those negotiated with suppliers, internal KPIs or recommendations from climate scientists. Investing in digital capabilities, such as automated dashboards can improve oversight of this data. Standardisation is also critical – this means using comparable metrics across different organisational activities to aid decision-making, especially when there may be conflicting targets, such as profit versus sustainability.
A final (and equally serious) consideration: the management of Scope 3 emissions will not remain static. Although downstream vehicle usage emissions will decrease with the transition to all electric vehicles, upstream emissions will become more challenging as total vehicle production emissions increase. Companies will need to become more agile – a challenge they have been facing for some time, not only in transitioning their design and engineering development, but also in getting ahead of the emissions moving target.