Challenges of GHG Disclosure from Small Suppliers

In the war on dealing with company contributions to climate change, battle lines are being drawn via corporate disclosure of greenhouse gas emissions (GHGs) data.

And here, two key trends are emerging.

Firstly, climate change disclosure and carbon-reduction performance are becoming key differentiators for business. Established brands are adopting carbon best-practices in order to maintain leadership positions within their sectors.

In Europe, the EU Non-Financial Reporting Directive demands that companies with 500 employees or more disclose data that effectively communicates its approach to environmental, employee, social, human rights, anti-corruption and anti-bribery issues, and the progress it is making to improve its response to those issues.

Secondly, as this disclosure landscape matures, more and more supplier companies and smaller businesses are being asked by their clients to report on their own carbon emissions contributions. With some now being brought into the scope of evolving emissions trading schemes and mandatory reporting programmes in various locations around the world.

This increase in reporting comes at a time when the disclosure process is maturing, but remains relatively complex. Indeed the recent Task Force on Climate-related Financial Disclosures (TCFD) asks firms to not only understand and report their supply chain carbon impacts (Scope 3 PG&S), but also future emissions scenarios.. This demand increases the need for good data from smaller companies and their supply chains, who often have little or no experience of collecting this data.

All of this points to a need for support and guidance for the smaller suppliers, that make up these long and complex supply chains, to help them understand and disclose GHG data with more confidence.

Nowhere is this more pertinent than in China, a country that still dominates mass production through a well established network of small-and large scale suppliers. And somewhere that UL has been operating for many decades, with over 3,000 local staff, deep expertise and networks.

China’s Paris Agreement commitment requires its CO2 emissions to peak by 2030. Many thought that had happened already, with declining emissions recorded between 2014 and 2016. However, largely driven by a rise in coal use, emissions jumped above 2014 levels in 2017.

But there is plenty of optimism that China will reverse this trend thanks to several climate-related policies. In 2014, it was mandated that all of the estimated 20,000 companies that emit more than 13,000 tonnes of CO2 equivalent must report their GHG impacts.

Meanwhile the Chinese national carbon trading scheme was implemented at the end of 2017, which means 25% of global GHG emissions are now covered by carbon pricing initiatives – up from 15% previously.

Such developments are helping to fuel a culture change within Chinese markets with more and more companies familiar with the need to disclose GHG data to satisfy various stakeholders, not least customers and investors. According to the Reporting Exchange, there are 50 reporting requirements and resources that mandate or guide companies in China in reporting ESG information.

The Chinese government is certainly encouraging companies to integrate sustainable development strategies into their daily operations and management rationale, with the state-owned Assets Supervision and Administration Commission of the State Council (SASAC) issuing guidance. And the China Securities Regulatory Commission (CSRC) has also produce requirements for listed companies on the disclosure of social responsibility-related information.

The production of standalone sustainability reports is also gaining traction as a useful entry point to GHG disclosure. The number of Chinese companies with a sustainability report has jumped dramatically, from just 19 in 2006 to more than 3,000 in 2016.

But progress remains slow. Less than a third of China’s listed companies publish ESG information about risks and impacts, for example.

For many companies in the West, gathering the right data, in the right language, from Chinese suppliers remains a challenge. There are also issues of visibility, particularly in sectors such as textiles. Here, buyers often only have direct business relationships with clothing manufacturers in the first-tier of their supply chain. They therefore have limited visibility of second and subsequent tier suppliers, including textile manufacturers and raw material suppliers.

At UL we see many smaller firms that are being asked to collect this data by their clients. We are helping these firms to understand their obligations and create solutions to help educate, structure and process the data collection using both our Western and Chinese advisory teams and software services.

Global policy interventions to drive carbon reduction are today forcing large corporates to ask their suppliers to provide emissions data. This is challenging smaller companies who need to be actively supported, engaged and encouraged to maintain momentum, set up GHG data collection processes and understand how best to reduce environmental impacts now and in the future.