In this roundtable discussion, experts from Barclays, Baringa Partners and Sacyr Spain debate the evolving landscape of sustainability efforts, focusing on supply chains and scope 3 emissions. Key themes include rising regulatory pressures, challenges in data collection and the need for cross-industry collaboration to foster meaningful change.

 

Roundtable participants:

  • Emily Farrimond, partner, ESG and sustainability lead, financial services, Baringa Partners
  • Encarna Mateos, head of quality, environment and energy, Sacyr Spain
  • Richard Tarboton, managing director, head of sustainability strategy and policy, Barclays
  • Jaya Vohra, managing director, global head of trade and working capital product and client management, Barclays
  • Shannon Manders, editorial director, GTR (moderator)

 

GTR: How are organisations around the world advancing their sustainability efforts, especially concerning supply chains and scope 3 emissions? What’s driving this?

Farrimond: Sustainability continues to rise up the agenda for companies for a number of reasons.

Global regulations, particularly in climate and sustainability, are driving momentum. In Europe, the Corporate Sustainability Reporting Directive (CSRD) will require comprehensive reporting across environmental, social and governance (ESG) aspects, influencing companies’ strategies.

Initially, businesses focused on direct emissions, scopes 1 and 2, but they are now shifting attention to indirect emissions, scope 3, which can comprise up to 80% of total emissions for many organisations. Given its significance, addressing scope 3 is pivotal for any net-zero target or strategy.

However, companies are grappling with calculating scope 3 and identifying hotspots at supplier and category levels. The challenge lies in gathering vast amounts of data from a wide variety of different suppliers across the supply chain.

Additionally, for some the impacts of climate change starting to manifest through shifting weather patterns is also driving action.

Tarboton: Regulation is a key driving force. In Europe, we’re seeing a number of requirements coming out that are going to come into force very soon. As Emily has said, CSRD will mandate reporting of scope 1, 2 and 3 emissions.

Companies are increasingly adopting science-based targets that require coverage of their scope 3 emissions if they are material. In fact, over a third of the total market capitalisation of companies in the world – measured on their total market value – has committed to setting such targets through the Science Based Targets initiative (SBTi).

We’ve seen tremendous progress, and every week, more and more companies are signing up to set targets and communicate the information that’s required by their investors, stakeholders and supply chains about what their emissions are and how they are improving on them over time.

Mateos: In 2021, Sacyr exceeded the targets set for 2025, reducing scope 1 and 2 emissions by 32% compared to 2016. For this reason, Sacyr updated its targets, validating them with the SBTi, the benchmark initiative for setting emission reduction targets in line with what climate science considers necessary to comply with the Paris Agreement.

The main problem we face in advancing scope 3, when we want to calculate, monitor and set targets, is often the lack of experience throughout the value chain, resulting in a lack of transparency in the information reported.

We have an extensive network of more than 20,000 suppliers and subcontractors, which makes our supply chains very complex. Around 80% of our activities, including services and materials procurement, are outsourced.

Regulations are tightening in this area. While scope 1 and 2 calculations are currently mandatory in many countries, there’s a rising emphasis on scope 3. Furthermore, our customers and investors are now pressing for scope 3 reporting and a clear commitment to reducing its impact.

Scope 1, 2 and 3 take on the same level of reporting and commitment.

 

GTR: How are scope 3 emissions measured and why are they particularly challenging to address?

Tarboton: Scope 3 encompasses all emissions from a company’s suppliers and customers, including those generated in the production and use of goods and services throughout the supply chain.

For example, if you operate an agricultural supply chain business selling food, all emissions stemming from farming activities, including those from tractors, machinery, soil management and crop cultivation, contribute to your scope 3 emissions. You can imagine that it gets quite complicated.

This complexity is compounded by geographic dispersion, with supply chains spanning multiple countries. That’s the first difficulty, and the reason why scope 3 is so challenging; the sheer volume and complexity of the data to collect and analyse is vast.

The second key issue is engagement and control. While you have direct control over enhancing energy efficiency within your own operations through investments and installations, influencing emissions within the supply chain is more indirect. You can exert some control through the contracts you award, requiring suppliers to meet specific standards. However, these suppliers have their own supply chains, contributing indirectly to your scope 3 emissions.

Engagement with suppliers is, therefore, a key vehicle for change.

For example, following an invitation from Barclays, over 350 of our suppliers representing approximately 75% of our supply chain emissions disclosed climate-related information such as targets and performance, emissions methodology and data related to climate change.

 

GTR: When you refer to Barclays’ supply chain emissions, does this indicate the companies that Barclays financially supports, or are these the suppliers providing goods and services to the bank globally?

Tarboton: Scope 3 emissions consist of 15 different categories. By far our largest emissions stem from the companies we finance, which is called ‘scope 3 category 15’. These are the entities we lend to, invest in, or facilitate financing for.

Our supply chain emissions are the 9,000 suppliers providing physical, intellectual or service-based products and services to us, including legal, consulting, building, equipment and technology.

There are three methods for supply chain emissions calculation: using average emissions factors, data from a data aggregator like CDP, and directly requesting emissions data from suppliers. Many companies start with the first method, with some progressing to collecting data through the CDP and eventually seeking direct emissions data from suppliers, though this level of specificity is still quite uncommon.

 

GTR: How can companies address the challenges surrounding the calculation and reporting of scope 3 emissions?

Vohra: Scope 3 emissions, like all other sustainability indicators, remain a challenge, especially due to the global nature of supply chains. Measuring emissions of companies in deep-tier supply chains requires careful consideration of methodology, standards and data collection. Companies need to adopt impact or risk-based approaches to measure a majority of their supply chains based on the best available standards. Companies need to invest in subject matter resources, but also technology and tools to facilitate such a complex change.

The discussion also needs to evolve further from scope 3 emissions to sustainability measures more holistically as a lot of organisations are investing in broader green or social and ethical objectives.

From a financing perspective, sustainability-linked financing does not solely target scope 3 emissions; it encompasses a broader range of green initiatives and sustainability-linked key performance indicators (KPIs) that could include scope 3 as a potential criterion. This broader set of objectives also lacks consistent standards today, especially in the trade and supply chain space.

Along with standards and data collection, the focus also needs to be on incentivisation and support to help large supply chains and small businesses deliver on scope 3 and the broader transition.

Mateos: I agree with everything that has been said and I would add a few more points on the challenge ahead with scope 3. Firstly, the active involvement of large companies is critical because of the ability to lead by example, influence their suppliers and ultimately drive a significant shift towards sustainability across the industry. Secondly, we need standardised calculation models. Currently, we find that these are not sufficiently standardised and developed. Thirdly, there is a lack of knowledge about what is needed to develop and implement a methodology for quantifying these types of emissions, with the risk that only what can be measured more easily is included in scope 3 reports, rather than more relevant items in terms of emissions. Finally, the collection of data from third-party sources is often based on estimates; some companies still do not calculate their own footprint. In addition, results from a small sample are sometimes extrapolated to the total of a category, increasing the uncertainty of the result.

Ultimately, one company’s scope 1 and 2 emissions are another company’s scope 3 emissions, so we need to work hand-in-hand with our supply chain to address scope 3 emissions.

 

GTR: Are there specific industries or regions encountering unique challenges in meeting sustainability goals within their supply chains? What solutions are recommended?

Farrimond: Every sector and region has its own nuance, so I will pull out a few examples.

Industries with multi-tier supply chains, like steel, pulp and paper, and farming, face challenges in influencing suppliers several tiers downstream. These suppliers may have the greatest impact on carbon emissions, spanning everything from raw materials to the finished product.

Consumer product companies are struggling to meet customer expectations while transitioning to more sustainable raw materials and packaging. Customers now demand products with the same performance but a lower carbon footprint. In the UK, there was a backlash recently when several companies altered the packaging for minced beef. While the product itself remained unchanged, consumers’ perceptions of it differed significantly due to alterations in the packaging.

It’s important to recognise that emissions are not the only challenges facing companies in their supply chain. Other concerns include modern slavery in supply chains, which is a critical topic for companies sourcing goods and services globally.

Developing countries often exhibit lower maturity or differing sustainability focuses. Strategies such as raising awareness, providing training, fostering collaboration, and offering incentives for proactive engagement can be implemented to address these challenges.

Cross-industry collaboration plays a crucial role in driving influence throughout supply chains. For instance, the Solar Stewardship Initiative addresses modern slavery challenges in solar supply chains through collective efforts. Direct engagement with tier two and beyond suppliers is another viable option, albeit time-consuming and requiring significant commitment.

 

GTR: Regarding cross-industry collaboration in sustainable supply chains, what roles do various stakeholders, including governments, consumers, and financiers, play in driving positive change?

Vohra: Consumers play a significant role in driving change, which is especially evident in behavioural shifts such as the demand for more sustainable and ethical products.

Governments and regulators are pivotal in setting direction and supporting sustainability efforts through investments, incentivisation and policy measures. However, the complexity increases within global supply chains, where diverse priorities exist across different regions. For example, the EU is driving more focus on emissions and climate change, while in Africa there may be other priorities around social development goals. We need to have a broad-based mix of measures and standards in place to help drive sustainability more holistically.

Financiers contribute by collaborating with clients across various sectors to develop financing packages aligned with sustainability goals. For instance, Barclays offers green and sustainability-linked versions of all our trade and working capital products globally, which aligns with our sustainability framework.

Export credit agencies (ECAs) also play a significant role in securing government-backed support for redirecting financing and investment toward more sustainable activities. At Barclays, we collaborate with UK Export Finance and other international ECAs to offer green and sustainable financing solutions.

Then there is the role of industry bodies, such as the International Chamber of Commerce (ICC), which is attempting to develop sustainable trade frameworks to address the complexities of assessing sustainability ratings in trade transactions, considering various factors like goods, end-use, mode of transport and certifications involved.

Underpinning all of that is the role of technology companies. As we discussed earlier, data capture is vital for enhancing transparency in the supply chain, and tech companies are instrumental in this aspect. Furthermore, the overall digitalisation of trade is imperative, considering that the majority of trade transactions still rely on paper-based processes, which pose challenges for data capture. Initiatives such as the Barclays, Department of Business and Trade and ICC United Kingdom Digitalisation of Trade Taskforce are making strides in this area, emphasising the importance of industry collaboration.

It is essential for all these stakeholders across the globe to come together to drive change.

 

GTR: What contributions are companies like Baringa making as stakeholders in this chain?

Farrimond: Due to the nature of our work, Baringa became a B Corp in 2022, signifying our commitment to high sustainability standards within our organisation. This involves transparency in our supply chain emissions, understanding and mitigating scope 1, 2 and 3 emissions, and setting ambitious sustainability targets. We produce annual reporting and strive for continuous improvement

We have a strong belief in systems thinking and prioritise partnerships and collaborations across ecosystems. Since 2018, we’ve established various forums to address systemic challenges, such as greening the built environment and transportation sectors. These forums aim to foster ownership of challenges and collaborative problem-solving.

We are also collaborative in how we work with our clients – we’ll involve clients in discussions with the UK government to provide insights into challenges related to green finance. Similarly, in financial services, we leverage sector-based expertise to enhance understanding of systemic challenges and promote shared ownership for solutions.

 

GTR: Encarna, building on your earlier remarks, beyond methodologies, what support, whether from financiers, government or others, do you believe is necessary to achieve sustainability goals?

Mateos: Reporting scope 3 emissions involves including emissions from other companies’ scopes 1 and 2. If all companies, big or small, are required by governments and financial institutions to share their scope 1 and 2 emissions, it would make reporting scope 3 easier. But there are challenges because there are many suppliers, employees and countries involved, each with different rules and sensitivities. Small and medium-sized businesses may not have to report if their energy consumption is low, which makes getting complete data very difficult. Big companies want to help their smaller suppliers comply, but it’s tough to bridge the gap.

The entry into force of CSRD will mark a turning point. The Directive aims to align sustainability reporting with financial reporting and respond to the information demands of the investment community and other stakeholders by giving them access to reliable and comparable data.

According to the deadlines established in the Directive, by 2028, a large number of companies – approximately 50,000 compared to the almost 12,000 that have done so until now – will be obliged to report non-financial information, which will increase the degree of knowledge and therefore commitment.

Let us not forget that this regulation requires detailed information on emissions to be disclosed and emission reduction targets to be set for scopes 1, 2 and 3.

 

GTR: As an industry, do we just have to wait for all the new regulations to bring everyone into compliance, or do we need to drive this process forward?

Tarboton: The sense of urgency has never been greater. Recent data shows that global annual temperatures exceeded 1.5C for a full 12 months, which means we are close to the limit of keeping the long-term average below 1.5C to prevent severe climate change impacts, so we must act swiftly. There’s no single solution to this challenge. Large-scale changes are necessary.

As a bank, we see this as an opportunity to finance the transition. Barclays has committed to facilitating £1tn of sustainable and transition financing between 2023 and 2030. We’re also focusing on innovation, investing in and scaling the climate technologies needed to transition – we have a mandate to invest up to £500mn of Barclays’ own capital by the end of 2027 in these companies. To date, we have mobilised £138mn into 21 innovative companies, covering property retrofit, hydrogen and battery technologies, among others.

 

GTR: How are organisations integrating sustainability-linked financing into their strategies to support and accelerate their sustainability efforts? What are the key considerations and challenges in implementing such financing mechanisms?

Vohra: The essence of sustainability-linked financing lies in its role as a facilitative tool for engaging organisations on sustainability. Financiers use it to assess businesses against sustainable goals before lending. However, corporates must first establish their sustainability objectives, tailored to their specific sector and industry. This involves selecting relevant KPIs, such as emissions for energy companies or social metrics for textile factories, for example, ensuring a comprehensive approach across the entire supply chain.

In the financing industry, sustainability-linked principles are primarily applied to loan products – there are no globally applicable standards for trade and supply chain finance. As a result, sustainability-linked financing often aligns with lending-based principles. There’s a pressing need for the development of comprehensive trade and supply chain standards that consider various aspects such as the end-to-end supply chain, goods, buyers, sellers and modes of transport.

To truly foster innovation throughout the supply chain, incentivisation plays a critical role. We’ve seen the structures evolve around supply chain financing where a large buyer sets KPIs for its entire supply chain to meet. If the suppliers meet these KPIs, the buyer may offer pricing incentives or provide access to supply chain financing options. This illustrates the various methods by which large organisations incentivise and extend financing to their deep-tier supply chains. It’s also crucial for these organisations to support their suppliers in adhering to the set KPIs.

Another aspect of innovation revolves around digitalisation and the importance of data capture. It’s incredibly important to establish standards that enable everyone to evaluate sustainable targets consistently. When it comes to assessing KPIs, companies typically appoint an ESG-focused fintech to assign ESG scores. However, these entities often utilise their own methodologies, albeit based on common principles, leading to variations in assessment standards.

 

GTR: Are financiers demonstrating enough innovation in this journey in terms of the products and services they’re bringing to market?

Farrimond: I’ve discussed some of the research we’ve conducted on access to green finance. Initially, we believed there was a shortage of green finance and innovative products in the market. However, delving deeper, we’re discovering frustration from financiers stemming from a lack of client demand. This highlights an ecosystem problem.

In the UK and beyond, we lack regulations that would channel demand into financial services products. We can’t really expect financial institutions to invest heavily in innovative products when existing ones have failed to attract the anticipated demand.

Governments play a critical role in creating the right policy environment and fostering education and awareness. Many companies are unaware of the need to decarbonise their operations or lack guidance on how to do so. Financing is just one step in the process, typically occurring after companies understand the need for action and determine their journey toward decarbonisation.

Tarboton: Banks have a key role in scaling up transition financing and innovative financial products in the market.

But the only way that our clients will be encouraged and have the demand for those financial products is if there is a strong investment case for them to drive the transition of their business.

At the moment, that investment case, in many instances and most sectors, is not strong enough.

Companies need to see greater economic returns from providing low-carbon products and services compared to maintaining the status quo of higher-carbon offerings.

Without stronger profitability in low-carbon activities and supportive regulatory frameworks, it’s difficult for banks and other stakeholders to help companies transition. We need the two aspects of carbon reduction and economic growth to come together into one combined and aligned set of incentives for companies to really act and mobilise the change we need in the transition to a sustainable future.

Vohra: I agree. Green and sustainable financing started off as a ‘nice to have’ but has quickly transitioned to a space of ‘must have’ – but many companies are unsure how to navigate this shift. Investment and incentivisation are crucial. Sustainable financing isn’t yet widely embraced because corporates struggle to understand its benefits. Regulatory treatment of sustainable financing is no more favourable than standard financing, making it challenging to help incentivise the shift.

However, corporates need a business case that is wider than just the financing benefits; they need to see the customer demand, business case, regulatory drive, investment and incentivisation to truly drive the transition to sustainability.

Also, as a financial services industry, we have only just begun to tap into the benefits of sustainable financing.

 

GTR: What are your final thoughts on the topic?

Mateos: In closing, I would say that the key is to make innovative technology accessible to our suppliers and subcontractors so they can provide accurate data. As I mentioned earlier, we must exert influence on these small and medium-sized companies, as they lack the leverage of larger firms like ours, and assist them in preparing and facilitating this process.

Farrimond: Transparency in supply chains across the variety of sustainability issues is critical to protect firms from future risk and create value.

 

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