Speaker 1: 0:04

Welcome to the Energetics Exchange podcast, conversations with Energy and Climate Experts. Please note that the information and commentary in this podcast is of a general nature only and does not take into account the objectives, financial situation, or needs of any particular individual or business. Listeners should not rely upon the content in this podcast without first seeking advice from a professional.

Speaker 2: 0:29

Hello everyone and welcome to another episode of the Energetics Exchange podcast series. I'm Dr. Mary Stewart, CEO of energetics. And today I, I'm joined by Energetics, principal, consultant, and climate risk expert, Olivia Kember . Together we're going to discuss the topic rising on many board agendas, decarbonizing their value chains. Before we start today's podcast, I'd like to acknowledge the traditional owners of country and recognize their continuous connection to land, waters, and communities. We pay our respects to Aboriginal and Torres Strait Islander cultures and to elders past and present. I'd particularly like to acknowledge the Gadigal people of the AOR nation as the country for woman where I'm broadcasting today. Hello, Olivia

Speaker 3: 1:12

Kiona Mary . I'm actually calling in from RO New Zealand, specifically Tam Makoto , otherwise known as Auckland today. So Lessness.

Speaker 2: 1:19

Thank you Olivia. And thank you for taking the time to, to join me on the podcast today. As a starting point, I'd like to briefly explain what value chain or scope three emissions are and the reason why more companies are focusing on them. Put simply Scope three emissions are all those that occur as a result of you doing business. They arise upstream in your supply chain from the production of raw materials and the provision of goods and services. And they occur downstream of your operations through distribution and use of your products and the delivery of your services. Scope three emissions are indirect. You don't control them, but they matter for two reasons. First, they can represent a source of risk to your business, and second, you can influence them with the introduction of mandatory climate reporting. Over the coming years, many Australian businesses are concerned about how they're going to measure and report on their Scope three emissions, and more importantly, develop and deliver programs to reduce these. Olivia, given the new Mandatory Climate disclosure regime is about ensuring that investors have information they require about the financial performance of a company. Why does this include the disclosure of Scope three emissions? The

Speaker 3: 2:24

Focus on Scope three emissions really goes to the two reasons you identified, but each one has different implications for how you measure them. So the first reason is that you're exposed to the transition risks associated with those emissions. That could be carbon policy costs being passed through to you by your suppliers, or it could be changes in the competitiveness of products downstream if lower emissions alternatives become available. So you want to know where the hotspots are in your value chain. The second reason is that you can actually help reduce your Scope three emissions. Not all of them, but some of them. And so you want to know which ones you can best influence. Now for identifying hotspots of risk, you can get by with pretty rough estimates, but if you're trying to reduce your Scope three emissions, it's very easy to get caught up in trying to get precise measurements so that you can track your progress. But measuring emissions is not as important as reducing emissions, and that's what we wanna focus on today. So Mary, let's say you've got a big Scope three inventory, which for most companies dwarfs their scope one and two emissions. You're looking at it, it's pretty confronting. If you want to reduce your Scope three footprint, where do you start? Typically

Speaker 2: 3:22

Companies look at these emissions, these footprints and rank them from biggest category to smallest category, and they'll say, well, I really need to focus on those categories where the emissions are greatest . But we look at both the , the SBTI, the Science-based target initiative and the Greenhouse Gas Protocol that have detailed criteria that companies should consider in identifying which scope three emissions they should prioritize. Typically, they only consider magnitude once. So the size of the emissions category is only looked at in one of those criteria. They look at other criteria which include the potential to influence the emission source, the significance of that emission source to your stakeholders, not only your shareholders sources that represent a significant risk to you. And then the new one that they've introduced is where you're potentially outsourcing activities to other companies that your sector typically delivers in-house. So prioritizing which categories to look at is not just about the ones that are the biggest, but it's about where you can apply influence and where you can actually make a change. Our recommendation is if you're starting out on this journey, you prioritize three categories. You really do need to include one of your big emissions categories, but then look at including those where you can definitely influence the reduction. It's , it's the low hanging fruit approach. If you want to make a change in your supply chain and you wanna build a successful program, choose an emission source where you know that you can really make a difference. These are most often the sources for which there are commercially a viable technologies for reducing emissions. We work across the breadth of the economy and have done so for 40 years. So we know what the emissions reduction pathways are for all aspects of your supply chain, both upstream and downstream. And we know where there's viable technology . So renewable electricity options commercially available EVs, for example, where it's easy and where there are commercially a viable options to reduce emissions is a good place to start. It's better on the short term to focus on scope three emissions that have these commercially viable first steps to decarbonization because you know, you can build and deliver a program in the near term.

Speaker 3: 5:20

So Mary, let's pick a category to work through. Um , greenhouse gas protocol, category one, purchase goods and services. Uh , most clients have substantial scope three emissions right there, but it's also a very diverse category. Products and services covers a lot, very, very different things. How would businesses tackle something like Cat one emissions?

Speaker 2: 5:38

So really just looking at what contributes to goods and services. They're two distinct activities. The provision of services is typically dominated by your professional services companies, your lawyers, your accountants, consultants like us. The carbon footprint of these companies is typically dominated by , um, emissions from the electricity they use. Energetics has a , um, assessed its carbon footprint for for 25 years, and we know that the majority of of our emissions are related to electricity, both base building , um, and, and our actual activities themselves. This can be a very dispersed category, including lots and lots of providers as you've highlighted, Olivia. Um, and reduction really should focus on grid decarbonization. So you can almost look beyond how many the 300 or 400 service providers are. If the grid decarbonize, you know, that the emissions associated with the provision of those services is gonna reduce. And maybe you should just look at contractual requirements. The the technology's commercially , um, available. There should be no barriers to any of your service providers reducing the emissions intensity of the electricity they buy. So when you next sign a contract with your lawyers, your auditors ask them how they buy their electricity or perhaps even require them to buy green power, and that will decarbonize that part of the supply chain really quickly. Purchase goods is a bit more complex. Companies with significant spend in this area. So manufacturers and producers of physical product really need to understand the emissions intensity of their raw materials as these could represent a significant risk. As you've already highlighted to Olivia , you need to prioritize your raw materials in the context of this risk and work with your providers to decarbonize them. It's not an insignificant challenge as they're not always commercially feasible. Pathways to reduce these emissions actions to address them are usually by mutual agreements and can be industry-wide, for example, where we are seeing efforts by the providers of building materials to , to reduce the emissions intensity of their products. So an industry-wide response, a research response, you could see how you can support your suppliers in those activities, but it's much more difficult to see a requirement to reduce emissions in this area. I'll note here that across the , the the 15 scope three emissions categories, the primary source of emissions is consumption of electricity through your value chain. So taking a step back from it all, if as a company you support decarbonization of the grid, you are supporting decarbonization of your value chain to a great extent.

Speaker 3: 8:01

So we started off with category one, but uh, if you take a different angle on that, say category 15, financial institutions are very focused on category 15 financed emissions. Um, and a lot of those emissions will be from electricity use in the businesses that they're invested in, or category 13 downstream leased assets. If you own or finance property and infrastructure, one of the most clear cut ways you can decarbonize them is to ensure that they switch to cleaner electricity. And these are categories where, as you say, the decarbonization technology is widespread, it's commercially available, it's competitive in a lot of cases, and the avenue for influence is very, very clear and there are contractual relationships you can leverage. So sort of that , that takes care of electricity . There's a , a quick win with renewable electricity. So let's turn to another emission source of magnitude. Liquid fuels across our 15 categories, liquid fuels contribute to up and downstream transport of materials, business travel and employee commuting, business travel and employee commuting probably don't make up big shares if most companies go three. But would you say they're worth prioritizing anyway?

Speaker 2: 9:07

So yes, I agree with you. For the majority of companies, those aspects of transport don't represent as significant in magnitude, but they are significant from a stakeholder perspective. So it is interesting to look at these emission sources in more detail. While they don't always represent in the top three emission sources by magnitude, it is one where you're able to influence decisions, you're able to influence how people travel, whether it be for business or whether it be commuting to your sites. And you can engage far more stakeholders when you start looking at these programs. Companies who are looking to reduce emissions through employee commuting as part of a staff engagement program have done so with great success, not only from the point of view of changing how people use transport and therefore driving down emissions, but it's been great for staff engagement and staff empowerment and they've had very positive feedback from these programs For companies that have outsourced passenger vehicle fleets for which decarbonization pathways moving towards EVs and buying green power, there is definitely a commercially viable pathway to reducing these emissions. And many people are pursuing these again with great feedback from their employees because they wanna feel part of the change. Prioritizing areas where you get additional benefits for you as a company and not just the emissions reduction is important. And under that sort of quick win that I was talking about earlier, it does give you great benefits and can be part of a very successful program. However, current approaches to estimating scope three emissions struggle to reflect progress that you make in these areas. It's not necessarily trivial to reflect what emissions reductions you've achieved through changing commuter patterns. As Olivia said upfront , measuring emissions isn't as important as reducing them, but if you're gonna go to the trouble of reducing your scope fees and you want , you want that to show up in your data. Um, Olivia, can you walk us through some of the challenges and and options that we've seen here?

Speaker 3: 10:55

So the easiest way to calculate upstream scope three emissions is to apply input output factors to your spend . You need expertise in terms of ensuring that you're applying the right factors to the right line items. But this is the fastest and simplest way to produce a ballpark estimate and that's what a lot of companies have done for a long time and it's pretty legitimate in terms of finding the , again, those risk hotspots. Problem is it's not accurate really, and it doesn't actually set you up to track progress 'cause the input output factors are industry average. They're very broad brush calculations and they don't necessarily reflect your suppliers. They get updated on a usually a five yearly cycle. So that doesn't reflect the different decarbonization trends in the economy. And of course, since there's spend base , they go up and down with your expenditure at the other end of the scale. And we're seeing more and more moves towards this. You can actually get your suppliers to provide you their actual emissions data, but that's very resource intensive for them and for you, especially the more suppliers you have as well. And the tools that are emerging to simplify this also have to overcome a number of methodological issues. So that will be the ultimate way that you get towards more accurate scope three footprints, but it's gonna take several years to get there. So in the meantime, Mary, what do you do to sort of on the one hand get beyond the spend based factors before having to implement some very, very complicated data scheme that involves tracking the actual emissions of every single supplier that you deal with?

Speaker 2: 12:17

We really do , uh, adopt the 80 20 rule where possible get the, the information for your big suppliers directly from them, but then start accepting that there will be some estimation in , in in your inventory and start looking at other approaches for increasing accuracy in , in those data points. There are some meta measurements. For example, information you can get from SBTI or from the net zero investment framework that , as I said, electricity is , is a primary source of emissions across many of your scope three inventory items or scope three categories. And if you can in some way work towards decarbonizing the grid, then you can claim some of that emissions reduction through your Scope three inventory. And as I said, as a service provider, 60% of our footprint is associated with electricity emissions. So you can start looking at, at more rules of thumb across the broad base of your scope three categories and inferring with grid decarbonization what a reduction might be in that. I will say that I think that AI has a significant role to play here. I don't think that in 10 years time, large companies are going to be going to every single one of their many thousands of suppliers. Um, AI will build those data sets much quickly and sufficiently accurately to allow you to track reductions going forward. You will ask for data from your top 200 or so, so , so suppliers. But AI has a significant role to play in modeling the rest of it. But just remember the quantification is not the final parts here. Really what you wanna do is reduce emissions. 'cause this will reduce risk and ultimately it'll reduce cost and it'll reduce your exposure to transition challenges in the near term. So work out how you're gonna reduce those emissions and work out how to implement those changes as soon as possible. Olivia, do you have anything else to add on how you've seen companies addressing these challenges

Speaker 3: 14:06

To date ? I think we've seen , um, it's some interesting experimentation in terms of how companies are using Scope three reduction efforts to build relationships. And so you talked a lot about how particularly with employee commuting, there's , there's co-benefits to be gained in terms of meeting other , I guess, goals for your stakeholders and, and strengthening the relationship you have with them. And that applies to a lot of other scope three categories too. I think that working with your suppliers and, and if you are a supplier to somebody else, being able to provide that emission starter for them perhaps proactively is, is certainly a , a goodwill step that will be valued. But there's, there's more that you can do together around how emissions reduction efforts that are happening upstream, how that progress can be something that you can recognize and reward and that in turn your stakeholders can recognize and reward.

Speaker 2: 14:59

Thanks Olivia, and thank you for joining me today and thank you to all our listeners. We hope we've provided a bit more clarity around value chain decarbonization and the importance of taking a step back to think about scope threes more holistically. On that note, the approach you take to reducing and measuring scope. Threes are dependent on the industry you're operating in. And if you'd like a more tailored briefing or have any questions on the topic, please contact us for our website .