While the past two decades have seen a concerted push by governments, investors and consumers to hold companies accountable for their carbon footprint with corresponding efforts in the business community to track and report their Scope 1 and 2 emissions, there remains a lack of Scope 3 emissions disclosures.

Measuring and reporting on Scope 3 is critical to any climate or decarbonization goal as these emissions typically make up 70 to 90% of a company's total carbon footprint. Yet, they can be extremely challenging to accurately measure and report as they lie beyond the company's formal span of control.

Against this backdrop, KPMG and the Pacific Basin Economic Council (PBEC) have launched 'Unlocking the Scope 3 opportunity in Asia Pacific', a report which provides an analytical overview of the Scope 3 emissions reporting landscape in the region, offering insights into one of the defining corporate themes of our time, and a look at how companies in Asia Pacific are responding.

The study analysed publicly available ESG reports from 338 companies listed on six stock exchanges, published between 2022 and 2023, leveraging data to provide a broad-ranging picture of the progress made by corporate Asia Pacific and where more effort is required.

Challenges in Scope 3 emissions disclosures

Measuring and disclosing Scope 3 emissions – indirect emissions occurring upstream and downstream of the company's operations – is challenging for various reasons, chief among which is that they occur outside of an organisation's direct control.

Obtaining this data usually requires an organization to engage deeply with their stakeholders, which is a time-consuming and costly process. Even when data has been obtained, getting good results relies on having consistent and accurate data capture processes and formatting. Building the right internal systems to support this will be a major organisational effort.

Organisations, in particular large ones, do not always have total visibility into their supply chains, especially when it comes to their extended supplier bases. In addition, the accuracy of reporting a company's Scope 3 emissions is also highly dependent on the availability and quality of primary data from suppliers in the value chain.

(Ms.) Phang Oy Cheng, Head of ESG and Sustainability Advisory at KPMG in Malaysia, said, "Under Bursa Malaysia's mandatory reporting requirements, since 2021, public listed companies (PLCs) in Malaysia are required to report on two Scope 3 indicators: business travel and employee commute. KPMG's recent study show that only 21% of 975 PLCs reported on the mandatory Scope 3 reporting requirements in their 2023 reporting cycle. Given Malaysia's net zero ambition, addressing Scope 3 emissions can help advance an organisation's decarbonization and sustainability journey. This emphasises the need to have comprehensive data on Scope 3 so that businesses can assess where the emission hotspots are across their value chain in order to prioritise reduction strategies."

Bridging gaps: Engaging supply chain stakeholders

Organisations can adopt a multitude of strategies to reduce their overall greenhouse gas (GHG) emissions, though tackling Scope 3 emissions depends on their ability to engage with stakeholders across the entire value chain: suppliers, distributors and consumers.

While Scope 3 emissions disclosures are expanding in Asia Pacific, with 62% of companies engaging in some form of reporting on their indirect emissions, overall supply chain environmental monitoring is still immature. Companies in the region generally demonstrate more focus on upstream emissions versus downstream emissions, as they typically have more control over their upstream suppliers than their downstream customers or logistics providers. As such, Asia Pacific companies are more likely to invest in supplier-side initiatives than customer-facing ones, but there are plenty of opportunities to mitigate downstream emissions too.

Phang further explained that Scope 3 reporting requires companies to transform their internal operating models, so they can accurately capture and report on their supply chain emissions. They will also need to create new supply chain strategies and adjust their external business models to reduce their emissions and progress towards a net zero target.

Increasing downstream influence

Scoping the downstream supply chain to increase influence can provide a great opportunity to address major gaps. By bringing production sites closer to their key customers and consumption centres, companies can optimize their logistical networks and lower their emissions. In addition, customer engagement is an important lever for reducing downstream Scope 3 emissions, either directly through education and collaboration or indirectly through company policies or marketing.

Meanwhile, 66% of Asia Pacific's companies report having integrated environmental and social requirements in their supplier onboarding process, reflecting the maturity of ESG awareness among procurement functions. Organizations should continue strengthening the integration of environmental and social requirements in their supplier onboarding process to upkeep upstream supply chain management.

By approaching these requirements as a strategic opportunity, organisations can gain operational advantages and ensure readiness for future disclosure mandates from a topline level.