Question

Should firms care about their Scope 3 emissions? Do they care?

It is often argued that ESG portfolios perform better during crisis periods. Provide one counter example.

In which way is Bitcoin (mining) contributing to climate change?

Answer 1

Scope 3 emissions

An effective corporate climate change strategy requires a detailed understanding of a company’s greenhouse gas emissions (GHG. Earlier, most companies used to focus on measuring emissions from their own operations and electricity consumption, using the GHG Protocol’s scope 1 and scope 2 framework. Later on, the focus shifted on the emissions that the company is responsible for & which are arising outside its premises from the goods it purchases to the disposal of the products it sells.
Released in 2011, the Scope 3 Standard is the only internationally accepted method for companies to account for these types of value chain emissions. Building on this standard, GHG Protocol has released a companion guide that makes it easier for businesses to complete their scope 3 inventories. Users of the standard can now account for emissions from 15 categories of Scope 3 activities, both upstream and downstream of their operations.

The GHG Protocol Corporate Standard classifies a company’s GHG emissions into three ‘scopes’. Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.

Scope 1:- Fuel combustion, Company vehicles, Fugitive emissions.
Scope 2:- Emissions from Purchased electricity, heat and steam.
Scope 3:- Emissions from Purchased goods and services, Business travel, Employee commuting, Waste disposal, Use of sold products, Transportation and distribution (up- and downstream), Investments, Leased assets and franchises

The Corporate Value Chain (Scope 3) Standard helps companies identify GHG reduction opportunities, track performance, and engage suppliers at a corporate level.
Most of the largest companies in the world account and report on the emissions from their direct operations (scopes 1 and 2). The new standards have now closed the previous GHG gap, thus the businesses can now act on the full range of corporate value chain and product emissions as well.
However, the Corporate Value Chain (Scope 3) Standard is designed to enable comparisons of a company’s GHG emissions over time. It is not designed to support comparisons between companies based on their scope 3 emissions. Differences in reported emissions of different companies may be a result of differences in inventory methodology, company size or structure.

Why should businesses care?

Emissions along the value chain often represent a company’s biggest greenhouse gas impacts, which means companies have been still missing out on significant opportunities for improvement. For example, road tester Kraft Foods found that value chain emissions comprise more than 90 percent of the company’s total emissions. Developing a full GHG emissions inventory – incorporating corporate-level scope 1, scope 2, and scope 3 emissions – enables companies to understand their full value chain emissions and to focus their efforts on the greatest GHG reduction opportunities.

Climate change is a global problem and businesses operate in a global environment. Value chains – and the risks and opportunities associated with GHG emissions – span national borders. Businesses operating in a global economy need a single, consistent, harmonized approach. Since the new standards take a value chain approach to emissions measurement and management that crosses national borders, this GHG Scope 3 standard has become even more important for the companies.
Businesses have found that developing corporate value chain (scope 3) and product GHG inventories delivers a positive return on investment. The new standards help companies to:

• Identify and understand risks and opportunities associated with value chain emissions;
• Identify GHG reduction opportunities, set reduction targets and track performance;
• Engage suppliers and other value chain partners in GHG management and sustainability;
• Enhance stakeholder information and corporate reputation through public reporting;
• Assess where the emission hotspots are in their supply chain;
• Identify resource and energy risks in their supply chain;
• Identify which suppliers are leaders and which are laggards in terms of their sustainability performance;
• Identify energy efficiency and cost reduction opportunities in their supply chain;
• Improve the energy efficiency of their products
• Positively engage with employees to reduce emissions from business travel and employee commuting.
• The new standards provide an essential foundation for strategic thinking about reducing emissions. They allow businesses to identify the biggest “hot spots” in their value chains – the activities that generate the most emissions. This allows businesses to focus on achieving the most meaningful reductions, not only from within their operations, but across global value chains. If the standards are successful, product and value chain GHG measurement will become standard business practice and companies all around the globe will have the information they need to effectively reduce emissions.

Do the firms care?

Use of the new standards is voluntary. In the future, governments and programs may decide to use the standards or some version of the standards when creating mandatory programs or regulations. As impacts from climate change become more prominent, governments are expected to set new policies and provide additional market-based incentives to drive significant reductions in emissions. These new policy and incentives will direct economic growth on a low-carbon track. Businesses need to start planning for this transition now as they make decisions that will lock in their investments for years to come.

The Corporate Standard classifies a company’s direct and indirect GHG emissions into three “scopes,” and requires that companies account for and report all scope 1 emissions and all scope 2 emissions. The Corporate Standard gives companies flexibility in whether and how to account for scope 3 emissions.

This standard is intended for companies of all sizes and in all economic sectors. It can also be applied to other types of organizations and institutions, both public and private, such as government agencies, non-profit organizations and universities.

Some of the companies that have implemented Scope 3 emissions are :-  3M,  Airbus,  Bloomberg LP,  IBM Corporation, Lenevo, IKEA, Kraft Foods, Pepsico, Pfizer Inc, Shell, Ford Motor Company.

ESG investment

In the industry, the term Socially Responsible Investing (SRI) is often used interchangeably with the terms like ESG investing, ethical investing, sustainable investing, green investing or impact investing.
The ESG Value portfolio is a portfolio designed to systematically invest in companies with positive environmental, social and governance (ESG) factors, while delivering return and risk characteristics of large and mid cap value stocks within the US equity market.

ESG stands for Environmental Social and Governance, and refers to the three key factors when measuring the sustainability and ethical impact of an investment in a business or company. Most socially responsible investors check companies out using ESG criteria to screen investments.
It is a generic term used in capital markets and commonly used by investors to evaluate the behavior of companies, as well as determining their future financial performance.
The Environmental Social and Governance factors are some of the non-financial performance indicators which include ethical, sustainable and corporate government issues such as making sure there are systems in place to ensure accountability and managing the corporation’s carbon footprint. The number of investment funds that incorporate ESG factors has been growing rapidly.

As the coronavirus spread continues to push markets on a downward spiral, investment commentators have agreed ESG investing could offer an element of downside protection as a result of the additional scrutiny placed on company business models, governance and work practises. Having a robust balance sheet, good market share and good corporate governance get the companies sail through the bad times. These companies have better governance, pollute less and treat people better. These tend to be successes over the long term and that is a positive for investors. Also, the companies that manage their people well, have flexible working practises built in, & have diverse supply chains. They will have a greater strategic resilience against the doenturns in the market because of good management, governance and good ESG standards.

However, that does not mean ESG investing is less risky. ESG investing is certainly not immune from downfalls in the stock market. ESG investing won’t protect investors from market paranoia, but it might help them identify the companies that have the resilience in their business model to benefit from over the long term.
During the extreme market downturns thats currently happening all over the global stock markets, investor behaviour actully become pretty indiscriminate with most rational and logical thinking going out of the window.

For example, with oil falling 30% in a day, now fossil fuels have become very cheap compared to renewables. Notwithstanding the environmental pressures, with fuel becoming significantly cheaper, it may actually slow the adoption of renewables in the near future, particularly in those countries that remain heavily reliant on oil. Since, the investors of different countries think differently about ESG investing, so it is not necessary that all ESG portfolios will perform better, especially the renewable sector.

Bitcoin (mining) contributing to climate change

Bitcoin mining is performed by high-powered computers that solve complex computational math problems (that is, so complex that they cannot be solved by hand, and indeed complicated enough to operate on powerful computers). The luck and work required by a computer to solve one of these problems is the equivalent of a miner striking gold in the ground.

Bitcoin mining, involves a global network of machines racing to solve complex math. In return for helping to keep the network secure, the solver receives bitcoin. When it comes to measuring energy use, the global nature of that activity makes it difficult to study, it’s hard to know what kinds of machines are running, where they’re located, and the fuel used to supply the electricity.

Bitcoin, is a type of cryptocurrency that is not regulated by a central authority. Instead, Bitcoin is backed by millions of computers across the world called “nodes.” This network of computers performs the same function as the Federal Reserve, Visa and Mastercard, but with a few key differences. Nodes store information about prior transactions and help to verify their authenticity. Unlike those central authorities, however, Bitcoin nodes are spread out across the world and record transaction data in a public list that can be accessed by anyone. Since Bitcoin’s founding in 2009, thousands of Bitcoins have entered circulation. China has been a dominant force in the cryptocurrency industry. Regions in China, such as the Sichuan, Yunnan, Xinjiang, or Inner Mongolia contain an enormous amount of surplus energy available to mining operations.

To maximize profits, cryptocurrency miners seek low cost electricity and permissive policy environments, creating environmental hazards and impacting local consumers without producing any benefit for communities. Cryptocurrency “miners” produce currency through energy intensive “mining” processes, requiring extensive computing resources.

The amount of energy and electricity it takes to feed cryptocurrencies greatly contributes to the number of greenhouse gases emitted into the atmosphere by power plants.
According to the Digiconomist magazine, the Bitcoin network "now consumes more energy than a number of countries," including Austria and the Czech Republic, and has a carbon footprint comparable to Denmark's. Depending on the energy source, researchers estimate that crypto-mining can produce 3-15 million tons of global carbon emissions.

A team of economic researchers at the University of New Mexico decided some times back to evaluate how much money all that energy use by Bitcoin costs and how much damage it's causing to the environment.According to the report, the team estimated that, in 2018, "every $1 of Bitcoin value created was responsible for $0.49 in health and climate damages in the United States". It shows that the health and environmental costs of cryptocurrency mining are substantial.
By using large amounts of electricity generated from burning fossil fuels, cryptocurrency mining is associated with worse air quality and increased CO2 emissions, which impacts communities and families all across the country.

Although cryptocurrencies can come from clean and renewable energy sources, but the cryptocurrency miner value profits above all and thus they stick to sources where electricity is cheap, that is fossil fuel like coal. Researchers estimated Bitcoin’s CO2 emissions at about 22 megatons per year. Altough some bitcoin miner argue that they use hydroelectic power, but during the dry seasons, they get back to fossil fuels in order to keep their profits intact.

The profitability of cryptocurrency mining is dependent on the currency’s market value in concurrence with the price of electricity.  As a result, miners seek cheap electricity markets that have policy environments that do not regulate the ways in which electricity can be consumed.
Continual electricity usage at peak levels also places substantial strain on residential power grids, causing degradation of grid equipment not designed for high density loads, and leaving the nearby residential community of thye miners vulnerable to fire risks. The estimated emissions produced by Bitcoin last year alone is 69 million metric tons of CO2.