In the coming months we expect to see far more small businesses asked for their environmental policies and plans as the ripples of pressure from large investors reaches smaller companies.
In this article we’ll use the example of a corporate bakery, Big Bread Co, to explore the practical implications of the rather confusingly named TCFD and SDR frameworks on small businesses.
What is the TCFD?
The TCFD, or Task Force on Climate Related Financial Disclosures, is a framework designed to help corporations and large companies assess their financial risk exposure to climate change. It’s useful for a range of stakeholders, from insurance companies to pension funds to banks and investors.
The aim is to gather more and more information on climate related risks so that companies can make more informed decisions and manage climate risk, and in turn climate change.
It’s complicated and more complex than the above summary, but for now that’s all you really need to know. We’ll explore why this slightly vague sounding framework is so important to your small business shortly.
What is the SDR?
The SDR, or Sustainable Disclosures Requirements, builds on the TCFD and goes further.
It was introduced during COP26 by the UK Treasury, and means some large companies will have to declare their climate impact, as well as risks.
This is a small but important change in language. Shifting from simply risk measurement to risk contribution, companies will be able to be held more to account for their climate inaction.
It’s too early to say if this will manifest in any meaningful way, but it signals an intent of direction for large companies which will have large ripple effects on the wider economy.
How does it impact You ?
So far TCFD and SDR is focused on large companies, however the ripple effects from these changes are likely to reach small companies in the coming months and years. In some cases, they already have.
Both frameworks are pushing for commitments and action on Net Zero. To fully understand the implications we need to understand how Scopes 1, 2 and 3 work in regards to measurement.
- Scope 1 – Created – Directly created emissions. Think tailpipes and chimneys. Gas used on-site, or any fleet vehicles you own and operate such as delivery vans.
- Scope 2 – Consumed – Emissions which you don’t directly generate, but are consuming. Typically this is your electricity and gas bills.
- Scope 3 – Everything Else! – This is everything you buy, sell and throw away. Scope 3 is typically the biggest part of your footprint.
Again, this is a broad oversimplification but it’ll do for now.
Scope 1 and 2 don’t really matter too much here. However they are the easiest to track as usually your business will have the data to hand on how much your energy bills are, how many miles you drive and fuel spend, flights taken etc. It takes a bit of digging but you’ll have this information already, usually in accounts software.
Scope 3 however is so broad and messy, and much more difficult to track.
Why is Scope 3 so important?
The challenges of measuring Scope 3 apply to large and small companies.
For example, if we look at Starbucks carbon footprint, 95% of their emissions sit in Scope 3.
This is because they will be leasing retail units, using subcontractors to move coffee around, buying sandwiches from other companies, using consultants and marketing agencies, and so on. They don’t own everything they use, and therefore a lot of their emissions are with their supply chain (Scope 3).
Therefore, for StarBucks or BigBread Co to reach Net Zero, they also need to reduce the carbon footprint of their supply chain. Each business is a complex web of different suppliers, all contributing in different ways to their carbon footprint.
As such, pressure will begin to mount on these suppliers to get on board and reduce their emissions down, or potentially be replaced in future with more environmentally active companies.
Not doing so puts the corporations at risk of TCFD and SDR pressure.
By having a sustainability policy and net zero target, you are working with your customers (BigBread). This makes their lives much easier!
Without one, you are hindering their progress and making it more difficult for them to meet TCFD demands around Net Zero.
We demonstrate this in the graphic below.
Scope 3 in 30 Seconds
When will it Impact my Small Business?
At some point you’ll be asked for your environmental policy or actions. Essentially, to make their lives easy, you need to also be working towards NET Zero and demonstrating action.
As we see from the example below, if you supply other businesses with services or goods it’s going to happen relatively soon. Even if you’re two or three stages removed, the nature of Net Zero means everyone has to be on board. The large company asks the medium sized company who then asks the small company who then ask their micro business suppliers.
It’s likely to begin accelerating throughout 2022 and 2023 as more pressure is exerted on the large companies by investors around TCFD.
Eventually BigBreadCo will need to be working with a supply chain which are all on the road to Net Zero.
Reducing their total emissions down means less climate change risk, which means more stable wheat growth and that they can sell more bread and make more profit.
To achieve this, they’ll start reducing their Scope 1 and 2 footprints down internally.
They’ll also start working with their suppliers to achieve Scope 3 reductions. This will start with their largest partners, such as the farmers they buy wheat from, and the haulage company they use to deliver bread to their stores.
As they work their way down the list of suppliers, they’ll also be asking their HR outsourced teams for their plans, their supplier of yeast, the company who maintains their fridges, their packaging suppliers and so on.
In turn, because these companies are also measuring their Net Zero impact, they will also start asking their suppliers in order to get their Scope 3 in order.
Real World Example
For example, Tesco recently declared that all suppliers need to have taken 4 steps:
- Declare details of existing emissions by end of 2021
- Declare Net Zero ambitions by end of 2022
- Declare Net Zero Strategy by end of 2023
- Switch to renewables as soon as possible.
Here we see that you don’t need to have a full strategy in place, but you do need to have some understanding of your impacts.
Tesco is aiming to reach Net Zero by 2035, which it cannot do without also tackling its considerable supply chain.
What should I do?
There’s several things you can do to get ahead of the curve.
- Write a sustainability policy. It can be super simple to begin with, but you’re going to want a single page or document where you can point people to find the answers there looking for. If you’re not sure where to start writing one, see this page.
- Start Measuring Scope 1 + 2 – As mentioned higher up, most companies will have this information somewhere already within your business and it should be relatively quick to find.
- Consider your own Scope 3 – It may be a bit early to start doing full auditing, but considering who you purchase from and avoiding taking on any new suppliers with poor or no environmental policy will put you in a stronger position long term.
The important thing is to start somewhere. The problem isn’t going to go away, and the longer you don’t take action the risk of you being dropped as a supplier increases.
Corporations will increasingly want to work with businesses that make their lives easy (don’t we all!) and as such lacking a Net Zero strategy or target will make you a blocker.
You won’t need a full audit and strategy just yet, but the more prepared you are the better.
Measure Scope 1 + 2. If every business does this, Scope 3 becomes a lot easier.
Unlikely to expect full audits just yet, but showing you’re doing something is better than nothing.