By Rajesh Chhabara
Across boardrooms around the world, directors are approving climate targets, overseeing transition plans and signing off on climate-related disclosures with increasing frequency. Yet many would struggle to answer a deceptively simple question: where do the majority of their company’s emissions actually come from?
That may sound surprising. After all, directors are expected to understand the key risks and drivers of the businesses they oversee. Yet climate reporting is revealing a reality that many boards are only beginning to appreciate. In some organisations, directors are being asked to approve climate strategies and emissions targets without fully understanding whether their most significant emissions arise from their own operations, their electricity consumption or their wider value chain.
This is not a criticism of boards. Until recently, most directors had little reason to become familiar with greenhouse gas accounting. Climate reporting was often viewed as a specialist sustainability issue rather than a matter of corporate governance. That is changing rapidly.
As disclosure requirements become mandatory in more jurisdictions, emissions data is moving from the sustainability team to the board agenda. The challenge for directors is not that they need to become carbon accounting experts. It is that they now need enough understanding to assess risks, challenge assumptions and exercise effective oversight.
Many boards instinctively associate emissions with factories, vehicles and industrial operations. In greenhouse gas accounting terms, these are Scope 1 emissions: emissions generated directly from sources owned or controlled by the company. For sectors such as aviation, shipping, cement, steel and energy production, Scope 1 emissions remain highly significant and are closely tied to operating costs, regulatory exposure and long-term competitiveness.
However, climate reporting has demonstrated that direct emissions often represent only part of the story.
Companies also account for Scope 2 emissions, which arise from purchased electricity, steam, heating and cooling. Although these emissions physically occur at the power station rather than within the company’s facilities, they are attributed to the company because it consumes the energy. For many businesses, Scope 2 emissions represent an important first opportunity to reduce their carbon footprint through energy efficiency measures, renewable electricity procurement and power purchase agreements.
The growing focus on Scope 2 emissions has also introduced concepts that many directors are encountering for the first time. Companies may disclose both location-based and market-based emissions, with one reflecting the emissions intensity of the local electricity grid and the other reflecting contractual energy purchasing decisions. The distinction may appear technical, but it has strategic implications. A company operating in a carbon-intensive grid can report significantly lower market-based emissions through renewable energy procurement, while still remaining exposed to the broader realities of the energy system in which it operates.
Yet it is Scope 3 emissions that have exposed the most significant gap in boardroom understanding.
Many directors assume that a company’s emissions are largely generated within its own operations. For a growing number of businesses, that assumption is simply wrong.
Scope 3 emissions arise across the value chain and can include emissions associated with suppliers, purchased goods and services, transportation, business travel, product use and, in the case of financial institutions, lending and investment activities. Companies may not own or directly control these emissions, but they arise because of the company’s products, services and business relationships.
For many sectors, Scope 3 emissions are not merely significant; they are dominant. A bank’s financed emissions can exceed the emissions from its offices and operations many times over. An automotive company’s largest emissions source often comes from vehicles during their use phase rather than from manufacturing. Technology and semiconductor companies frequently find that the majority of their emissions are embedded within their supply chains rather than generated by their own facilities.
This is where climate reporting becomes far more than an exercise in disclosure.
A company’s emissions profile can reveal dependencies within its supply chain, vulnerabilities in its business model, exposure to customer demands and potential transition risks that may not be immediately visible through traditional financial reporting. In that sense, emissions data is increasingly becoming a source of strategic insight rather than simply a compliance requirement.
This is particularly true of Scope 3 emissions. What was once viewed primarily as a sustainability reporting obligation is rapidly becoming a commercial issue. Customers are requesting emissions data from suppliers. Procurement teams are incorporating climate considerations into sourcing decisions. Investors are scrutinising transition plans and value chain emissions with increasing intensity. In many industries, the ability to understand and manage emissions beyond a company’s own operations is becoming a competitive differentiator.
Twenty years ago, a director who could not explain the fundamentals of the company’s financial position would have struggled to fulfil their responsibilities effectively. Today, no one is suggesting that directors must become climate specialists. However, it is increasingly reasonable to expect boards to understand where their company’s emissions arise and how those emissions may affect the future of the business.
The most effective boards will not be those that can recite greenhouse gas methodologies or reporting protocols. They will be the ones that recognise the strategic significance of the information in front of them and ask the right questions of management.
The most important question is not simply, “What are our emissions?”
It is, “Do we understand where the most significant emissions arise across our value chain, and do we have a credible strategy to address the risks and opportunities they create?”
As climate reporting continues to mature, that is becoming less of a sustainability question and more of a board responsibility.
The writer is Managing Director of sustainability consulting firm CSRWorks International.
