ICAEW.com works better with JavaScript enabled.

Suppliers to large UK companies face sustainability scrutiny

Author: ICAEW Insights

Published: 09 Dec 2022

Large UK public companies are now required to report on climate-related issues – but all companies, irrespective of size, within their supply chains must also reduce their emissions so that the larger organisations comply with the rules.

Scope 3 emissions, also known as ‘value chain’ emissions, are indirect greenhouse gas (GHG) emissions within the supply chain of an organisation’s main operations. Scope 3 is not about reducing the impact of just one organisation, though – it is about contributing to a global shift to a lower carbon economy.

Many organisations find that the largest part of their carbon footprint lands within Scope 3. These emissions fall outside of an organisation’s direct control, but remain their responsibility. This makes them simultaneously the most critical and the most challenging emissions to manage for many. 

For an organisation to gain approval of its science-based targets (SBTs) for emissions reduction, it needs to include its Scope 3 emissions. This means that for large companies trying to meet mandated Task Force on Climate-Related Financial Disclosures (TCFD) reporting requirements, their suppliers must provide climate data to evidence Scope 3 emissions.

Sophie Parkhouse, Technical and Training Partner at Albert Goodman, says: “If you’re a small organisation and you work with an organisation that's a lot larger than you, you are impacted by the regulation that’s imposed on them, which is why it’s having that trickle-down effect.”

The Greenhouse Gas Protocol divides Scope 3 emissions into 15 categories, ranging from purchased goods and services, capital goods and fuel and energy-related activities to upstream transportation and distribution, waste generated in operations and business travel. Although data collection can be patchy, unreliable and in variable formats, more companies are beginning to engage with their value chains and work with them to improve.

Parkhouse, who also sits on ICAEW Practice Committee and its Financial Reporting Board, points to the UK Green Finance agenda and the UK government’s 2050 net-zero aspiration as a starting point for lenders. In light of this, she says banks are beginning to have conversations with their clients, challenging them to define and evidence what they are doing to reduce their carbon footprint, and using the ‘carrot’ approach to encourage clients to engage with sustainability issues.

“If clients are able to demonstrate that they are engaged with sustainability, then they can receive preferential lending rates so there is obviously that cost reduction element to it as well,” Parkhouse says.

In addition, she has worked with some small organisations that have applied for government funding or local council grant funding and, as part of those funding requirements, they’ve had to draft a net-zero plan. 

Jo Muncaster, Associate Director of Carbon Accounting at decarbonisation group City Science, says the public sector is leveraging its procurement power to change behaviours in sustainability. “The place that we are seeing developments the most is through procurement, so bids and tenders for predominantly local authority tenders – that is changing. In some cases, they are just asking the questions. In other areas, it’s becoming part of a graded part of a tender, so it counts towards maybe 5% of a tender value.”

She also says some organisations are beginning to use a benchmarking system, where they sign up their suppliers based on a questionnaire process.“That gives them the opportunity to point suppliers in the right direction and help them improve their supplier status through a grading process.”

Lee Hallam is director of commercial operations at FX Plus, which carries out procurement for Falmouth University and the University of Exeter. The company set a 50% reduction target for its Scope 3 emissions by 2030, aiming for net zero by 2050. 

To attain its targets, FX Plus has taken a Responsible Procurement route that aims to improve its supply chain around social justice, such as gender pay reporting and apprenticeships, as well as carbon reduction. 

In its tendering process, 20% of its scoring is now allocated to carbon reduction and social values. The company is currently awaiting its first batch of tenders for contracts lasting three to five years based on this new process. “If you’re not playing in this space, you’re very unlikely to win a contract with us going forward,” says Hallam.

Before introducing this new tendering process, FX Plus conducted an educational programme, offering workshops to suppliers in a bid to help them engage with the issues. It is also planning quarterly educational events such as webinars, talks and discussions to encourage cross-fertilisation of ideas among its non-competitive suppliers.

“We’re asking suppliers to tell us how they plan to be sustainable over the lifetime of a contract. If they don't meet those targets, we can hold them to account and ultimately terminate the contract if they fail to meet the terms. But we want to support them with knowledge transfer,” Hallam says.

Despite the green shoots emerging, Parkhouse says: “Although we’ve had some discussions with some of our smaller clients, I wouldn’t say that a lot of them have taken significant action as yet. I think we’re very much in the education phase. We've got to change our behaviours, but it’s a cultural shift, which will take time.”

This shift requires resources, time, money and, most importantly, a change in mindset, but if suppliers begin with the most material aspects and the areas they can influence, it is possible to take manageable steps and reduce carbon footprints. Moreover, there are commercial and competitive advantages to be gained.

Useful resources

Finance for the Future

The 2023 awards are open for entries.

Finance for the Future Awards logo

Discover more from ICAEW Insights

Insights showcases news, opinion, analysis, interviews and features on the profession with a focus on the key issues affecting accountancy and the world of business.

Podcast icon
Insights Podcast

Hear a panel of guests dissect the latest headlines and provide expert analysis on the top stories from across the world of business, finance and accountancy.

Find out more
Daily summaries
Three yellow pins planted into a surface in a row
News in brief

Read ICAEW's daily summary of accountancy news from across the mainstream media and broader financing sector.

See more
A megaphone
Stay up to date

You can receive email update from ICAEW insights either daily, weekly or monthly, subscribe to whichever works for you.

Sign up