Environment, Social and Governance (ESG) reporting has become a key tenet of business’ move to net zero emissions.
As noted in our long-read article looking back on COP26, it is mandatory in the UK for listed companies that have an annual turnover exceeding £500 million or more than 500 employees.
While it isn’t legally required yet for MSMEs, most smaller firms do it in some way, with 77% having a purpose statement related to ESG, according to Quoted Companies Alliance.
Actually doing ESG reporting properly is challenging though. Jane Tait, a customs consultant at the Institute of Export & International Trade (IOE&IT), told me that having the right information in place to report on ESG is a significant issue for firms.
“The key challenge for companies is how do you organise yourself for this and what type of reporting systems do you need to capture all the data that is required, which is really comprehensive,” she says.
For firms that trade internationally, with complex supply chains and overseas partners, this can be especially difficult, particularly given the industry’s historic reliance on paper-form documentation. It’s for this reason that digitalising trade processes and improving supply chain data is so important.
The Scope 3 challenge
There are three types of emissions that need to be monitored and reported as part of ESG.
- Scope 1: emissions that are direct to greenhouse gas emissions and are generated by a company while performing its business activities
- For manufacturers, for example, this will include the manufacture or processing of chemicals and materials, as well as the transportation of these materials and the end products that is controlled by the company
- This also includes the generation of electricity, heat or steam by the company
- Scope 2: indirect emissions generated by the production of purchased energy – eg purchased electricity, heating and cooling
- Scope 3: all other indirect emissions from the company value chain
Emir Sassi, global head of procurement sustainability at Novartis, says that scope 3 emissions are particularly significant, writing on Raconteur: “the size of scope three as part of our total GHG emissions is more than 90%.”
Carmen Amieva, a customs specialist team lead at the IOE&IT, tells me that this is a “huge area for many companies to manage” because it includes are lot of non-direct emissions.
“Employee vehicle travel, factory and office emissions are often easier to track but count for less than 10% of the greenhouse gas emissions total,” she says. “The rest is generated from within the supply chain.”
Importance of supply chain data
Chris Gledhill, the CEO and co-founder of independent software engineering firm PDMS, says that digitalising trade processes across the supply chain has an “essential role” but notes that there is still a “huge amount of uncertainty about what is acceptable”.
“We all need to know what the carbon or what the climate impact is of all business activities and we need to be able to report that through supply chains in a consistent way,” he tells me. “So ultimately the digitalisation and standardisation of that is probably the only way we're ever going to achieve it.”
Work in progress
The digitalisation of trade information and border processes has been a significant pillar of the IOE&IT’s recent activity, including through its work supporting the government in launching a new Single Trade Window and Ecosystem of Trust.
It has also partnered with Coriolis Technologies on the development of an ESG monitoring tool, which aims to support exporters and trade finance firms to track and prove compliance with sustainability standards across the supply chain.
Ilona Kawka, a digital trade and customs specialist at the IOE&IT, says that adopting digital tools is a must.
“Using a digital reporting software ensures that your reporting is future-proof and allows you to adapt the results to constantly changing legislation,” she says.
“Aside from the aspect of minimising the manual data collection procedures that require manual work and is time-consuming, using technology in ESG reporting makes the data more transparent and trustworthy.”
The introduction of the Electronic Trades Document Bill in UK Parliament last week was hailed as a landmark moment for trade digitalisation and it could have a significant impact on net zero in multiple ways.
According to the 2021 UK Law Commission consultation on the bill, global container shipping requires 28.5 billion paper documents each year, so there is a clear material impact.
Jens Munch Lund-Nielsen, the head of global trade & supply chains at the IOTA Foundation, says increased efficiency through the utilisation of digital information for cross-border trade, rather than paper, could also have a significant impact on emissions caused by ships and trucks in ports.
He cites research that found that for every 15 minutes spent by DFDS ships in a port, a tonne of heavy fuel is used. He also notes that lorries spend a significant amount of time “sitting idle” in ports. He argues that if you can increase efficiency through the use of data – removing the need for physical paperwork to be checked – you could save a significant amount on fuel emissions in ports.
“There’s inefficiency in the system and that's where the big impact is,” he says. “Taking the paper away is the first very concrete step, but better visibility and efficiency across the supply chain is where there will be a massive improvement.”
The benefit of this goes beyond ESG reporting too.
The International Chamber of Commerce has found that digital documentation could generate £225 billion in efficiency savings, £25 billion in SME trade growth and £1 billion in new trade finance.
Frederic Jean-Baptiste, an IOE&IT business member and chief executive of global trade services provider Customs & Freight, tells me digitalisation will help firms to “make better decisions” that will both help firms to reduce emissions and be more competitive.
“It comes down to being able to make better decisions,” he says. “Because, if you think about it, without proper visibility you might make decisions that consume more energy or you might waste time on a journey because you didn't know, for example, that there was disruption on the roads or in the port.”
There will be an adaption process to this, Chris Gledhill tells me, but the opportunity is significant.
“This is a new area and we're clearly going to have to create a whole set of procedures and essentially agreements around information,” he says. “But this will allow global trade to be properly auditable from a climate point of view. This will allow us to drive the right behaviours in terms of mitigating and changing things.”
Thank you to Ilona Kawka, Carmen Amieva, Jane Tait and Rosana Verza for their research and support for this article.