Are you a supplier of goods and services or third-party service provider at the upstream of the business value chain?
If you are, your customers may have come knocking at your door to ask the following questions:
- Have you started to calculate your carbon footprint?
- What is your strategy to reduce or offset your carbon emission?
- What is your roadmap and targets to reduce your carbon footprint?
- Do you have an appointed team to champion sustainable practices in your business?
Why do your customers ask such questions? It could be due to either or both of the following:
- Your customer needs to fit in your responsibility on sustainable practices in their business strategy and risk management;
- Your customer has to justify Scope 3 emissions in their ESG disclosure.
Overwhelmed by the above? Let’s demystify these ESG terms so that you can get your engine going to justify your Corporate Sustainability Responsibility1 to your customers.
What is ESG?
ESG means Environmental, Social and Governance, where specific and measurable criteria are set in the following areas:
- Environmental: focus is on protecting our environment. Focus areas include climate change, pollution, carbon and greenhouse gas emissions.
- Social: focus is on human interdependencies and human relationships. Focus areas include gender diversity and mental health.
- Governance: focus is on the governance processes to run an organisation. Focus areas include board composition and hiring practices.
The focus of this article is on the Environmental pillar, as this in our view, is a journey in itself to understand these environmental risk terms and their applications to your business. Our articles aim to help your business get a good understanding of the ESG terms to smoothen your process to meet ESG standards.
What are the common ESG Terms?
We shed some light on ESG Terms that appear frequently in the public domain.
Gases that are emitted when we burn fossil fuels, produce and consume goods and services. These gases include carbon dioxide, methane and nitrous oxide. Such gases contribute to the greenhouse effect i.e., warm our Earth’s atmosphere.
Emission of carbon in the course of conducting your business which involves your entire value chain. This effectively includes your suppliers’ and service providers’ emissions (upstream), your use of electricity and fossil fuels, your employees’ emissions and your customers’ emission (downstream).
There are 3 types of emissions described under the Greenhouse Gas Protocol2:
- Scope 1 emissions: direct emissions from owned or controlled sources.
- Scope 2 emissions: indirect emissions from the generation of purchased energy.
- Scope 3 emissions: indirect emissions not included in Scope 2, that occur in the value chain of the organisation, including upstream and downstream emissions.
Total greenhouse gas emissions associated with an organisation. Basically, it is the total of Scope 1, Scope 2 and Scope 3 emissions of an organisation.
Carbon dioxide that is released into the atmosphere from an organisation’s activities are balanced by the same amount being removed.
Net Zero Emission
It is the same concept as carbon neutral, but it is on a much larger scale and typically used as a term at the country and global level. It also covers all greenhouse gases and not just carbon dioxide. Take for example, Singapore has targeted net zero emission by 2050.
Reduction in greenhouse gas emissions or an increase in storage of carbon dioxide via planting of trees, land restoration etc, that compensates for emissions that occur in other activities.
There are projects that reduce the emission of greenhouse gases that can be considered for carbon offset, such as renewable energy implementation, industrial energy efficiency and planting of trees.
Disclosure of data relating to your business’ environmental, social and governance performance. It is used interchangeably with Sustainability Reporting and ESG Reporting.
Such disclosure is increasingly being emphasized by regulators for compliance by businesses. In Singapore, we are pending decision by SGX RegCo and ACRA to advise on a roadmap for sustainability reporting by Singapore-incorporated companies3.
Where do you go from here?
Increasingly, your customers and investors would want to see concrete milestones in your roadmap and concerted efforts by your business to reduce your carbon footprint over time.
To start the ball rolling, it is important for your organisation to review and document the areas where your business is contributing Scope 1, 2 and 3 emissions, followed by determining the areas where your business could reduce the level of greenhouse gas emissions over time or combine with carbon offsets from other activities.
LEARN MORE in our articles on ESG and Sustainability to kickstart your
Corporate Sustainability Responsibility journey!
1/ Our article on Corporate Sustainability Responsibility (“CSR”) – LGD Personal Development provides an overview of ESG landscape applicable to a business.
2/ Greenhouse Gas Protocol website at Greenhouse Gas Protocol | (ghgprotocol.org)
3/ Media Release (21 June 2022) by SGX: ACRA and SGX RegCo set up a Sustainability Reporting Advisory Committee: www.sgx.com