ESG Focus: Nutting Out Scope 4 Emissions

ESG Focus | Apr 28 2022

This story features BLUESCOPE STEEL LIMITED, and other companies. For more info SHARE ANALYSIS: BSL

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

ESG Focus: Nutting Out Scope 4 Emissions

By now, most investors are aware of Scope 1, Scope 2 and Scope 3 emissions, but there is a less familiar member of the Scope family on the way – let us introduce you to “4”.

-Defining Scope 4 emissions
-Why do we need a fourth child?
-Credit Suisse checks out the Australian scene
-So many unknowns

By Sarah Mills

By now, most of us are comfortable with the application of Scope 1, Scope2 and Scope 3 emissions in the ESG universe.

As a quick recap, Scope 1 refers to a company’s own emissions, Scope 2 refers largely to a company’s energy inputs such as electricity and gas, and Scope 3 refers to emissions produced from a company’s upstream and downstream value chains.

But there is also a fourth member of the family – Scope 4 emissions. 

These generally describe those emissions which can be avoided by using a company’s comparatively lower-emission product or service – let’s just call them “avoided emissions”.  

They refer to emissions that occur outside a product’s value chain, but occur as a result of using the product.

Examples might include low-carbon cement or low-temperature detergents.

The term can also be used to describe avoided emissions from work-from-home policies in some instances, and include services such as teleconferencing. 

Reuters reports that Sense data research suggests that while office emissions fell during covid, residential emissions rose an average of 35% at midday.

"The shift to work from home hasn't only moved emissions off the balance sheet. It's moved employees into sick buildings," says Stephen Bay of Earthup. 

The latter poses some problems – particularly the challenges of collecting Scope 4 emissions data from employees’ homes.

Scope 4 emissions also include carbon savings across the product lifecycle, which might for example, favour bricks over less durable materials.

The Rationale For Scope 4?

Scope 4 correlates loosely with the aforementioned Scope categories, but they must occur outside of a product’s upstream and downstream value chain to avoid double-counting. 

They specifically incentivise companies to invest in and offer lower-emissions products to customers, and for customers to buy them.

Their purpose appears to be to accelerate the transition through both the business and residential communities.

They provide a more holistic view and a means for measuring emissions derived from innovation and outstanding emissions efficiency. 

The Climate Disclosure Standards Board says the category is necessary given that if a company improves efficiency, that success and expense can be obscured by increased sales of that product or service. 

For example, a toaster manufacture could make a more efficient product but its other Scope emissions could rise by stronger uptake of that product.

Credit Suisse says it also covers instances where some products might entail higher emissions but have a longer lifespan, hence netting to lower emissions overall. 

The analyst says Scope 4 emissions should also help solve the challenges of higher-emissions intensity arising from the scaling up of the green transition for longer term benefits. One assumes this could apply to low-carbon steel investment (think Bluescope Steel ((BSL)) ), or hydrogen investment a-la Forstecue Metals Group ((FMG)).

Measuring And Reporting of Scope 4 Emissions

Avoided emissions are measured by comparing a low-carbon product with an industry baseline/average.

Inputs include material acquisition and pre-processing, production, distribution and storage, the product's use, and its durability/end of life.

At the moment, companies aren’t required to report on Scope4 emissions – despite being initially proposed in 2013.  While it is most likely only a matter of time, it is salient to note that no timeframes for introduction have been set in the easily accessible literature. 

In the meantime, a lack of disclosure regulations and frameworks poses a greenwashing risk, i.e. investors might invest in companies that are touting Scope 4 emissions innovation which are never drawn into the accounting framework, leaving those investors holding the capital expenditure baby.

Scope 4 Progress In Australia

In a research article on the topic, Credit Suisse explores the key challenges and benefits posed by Scope 4 reporting.

“Corporate interest in quantifying emissions is growing as it enables companies to showcase low-emission products to customers, informs product R&D [research and development] and portfolio planning and enables investors to assess a company’s gross emissions profile,” says Credit Suisse.

“It could potentially provide an additional revenue stream through carbon credits, though regulators may be hesitant to award such credits given lack of frameworks and consistency.

The analyst notes that low-carbon products examples include: Alumina Ltd’s ((AWC)) EcoSource alumina, Rio Tinto’s ((RIO)) ELYSIS green aluminium, and Boral’s ((BLD) low-carbon concrete. I would add Fletcher Building’s ((FBU)) low-carbon products to that list.

Recycled products such as steel and copper – think Sims Metal ((SGM)) – and glass – think Orora ((ORA)) — also qualify as Scope 4 emissions.

Credit Suisse says reported energy efficiency of products compared to a baseline also count, and that Brickworks ((BKW)), James Hardie Industries ((JHX)) and Reece ((REH)) are also reporting on (and highlighting) the efficiency levels of their products.

Interestingly, Brickworks demonstrated that brick homes are more energy efficient, are more durable and last longer than other products, perhaps pointing to a new life for brick construction.

The analyst also points to the Australian REIT sector which is leading the REIT world in emissions cut, noting GPT Group’s ((GPT)) and Stockland’s ((SGP)) portfolios of energy efficiency properties also count as avoided emissions.

Products in the wings include Strike Energy's ((STX)) Project Haber, which produces very low carbon urea, which could cut the agriculture industry's emissions by -60%.

Australian Government And Sovereign Emissions

As a fossil fuel producer, Australia’s Scope 3 emissions are hefty. Whether it is likely to affect the country’s credit rating has yet to be seen.

There has been little easily obtainable information on Scope 4 emissions and governments, the majority of focus being on their application to companies.

Could regulation of such emissions count as “avoided emissions” on the government’s behalf? To date, it appears unlikely – but a thought experiment like this is useful.

For example, Corrs Chambers Westgarth notes there is currently no requirement in Australia for companies to offset Scope 3 emissions of a project (including energy and gas mining) as a precondition to obtaining approval.

Similarly, could a country that produces inputs for the green transition (given its overall emissions intensity may rise as a result) count as Scope 4 emissions?

Right now, that side of things is about as clear as mud to your average punter like me. But it does illustrate the potential and challenges of the Scope 4 construct.

It also shows that while to date, the government has lagged on emissions regulation, it may have many and varied levers it at its disposal should it feel the necessity. 

It also points to growing uncertainty and unknown risks for fossil-fuel miners – and they aren't the only ones.

Scope 4 also could end up throwing a few curve balls for any number of companies in any number of industries on any number of fronts. 

Watch this space… 

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

AWC BKW BSL FBU FMG GPT JHX ORA REH RIO SGM SGP STX

For more info SHARE ANALYSIS: AWC - ALUMINA LIMITED

For more info SHARE ANALYSIS: BKW - BRICKWORKS LIMITED

For more info SHARE ANALYSIS: BSL - BLUESCOPE STEEL LIMITED

For more info SHARE ANALYSIS: FBU - FLETCHER BUILDING LIMITED

For more info SHARE ANALYSIS: FMG - FORTESCUE METALS GROUP LIMITED

For more info SHARE ANALYSIS: GPT - GPT GROUP

For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC

For more info SHARE ANALYSIS: ORA - ORORA LIMITED

For more info SHARE ANALYSIS: REH - REECE LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: SGM - SIMS LIMITED

For more info SHARE ANALYSIS: SGP - STOCKLAND

For more info SHARE ANALYSIS: STX - STRIKE ENERGY LIMITED