Scope 3 greenhouse gas emissions relate to those produced by a company’s supply chain. It’s the tricky sibling of Scope 1 and 2 emissions, which are much easier for a borrower to control because they concern the borrower’s own emissions and where it gets its energy from.
But this was the week when the supply chain embraced its own emissions with a €700m sustainability linked bond for French auto parts maker Valeo.
Measuring Scope 3 emissions is hard. Valeo puts a 15% weighting on its Scope 3 emissions in its sustainability linked financing framework, and therefore the key performance indicators on its SLBs, compared to a 75% importance on Scope 1 and 2.
But now, with companies like Valeo printing SLBs, the companies that Valeo supplies — some of the biggest car makers in the world — are getting a much clearer view on their Scope 3 emissions.
Investors need to push borrowers to focus on this. Scope 1 and 2 reductions are commendable objectives, but by definition they only measure the emissions of one company. Scope 3 forces issuers to hold its supply chain accountable, bringing more companies into the sustainable practices necessary to achieve the lofty goal of net zero emissions by 2050 in place around the world.
Issuers can respond by convincing the bigger companies in their supply chain to consider sustainability linked finance. Europe’s loan market is awash with banks desperate to sign sustainability linked loans at a time when smaller, club facilities are highly favourable to the borrower, and Valeo’s debut SLB was rewarded with a €2.3bn book allowing it to pay zero new issue concession.
Scope 3 is the game changer in cleaning up corporate greenhouse gas emissions. Time for investors to turn up the heat.