New Scope 3 emissions reporting requirements highlight urgency of supply chain transformation

With the implementation of new climate disclosure requirements for listed companies starting from 1 January 2025, managing evolving environmental, social, and governance (ESG) concerns along the supply chain has emerged as a priority for governance professionals and business owners, according to a joint paper from Deloitte China and The Hong Kong Chartered Governance Institute (HKCGI).

The Supply Chain Management: An Introduction & Applied Governance Perspectives explores the latest developments in the regulatory environment and key considerations in supply chain resilience and sustainability, while exploring roadmaps for building future-ready supply chains.

According to a recent Deloitte report, over 40% of the more than 2,000 C-level executives surveyed globally identify climate change as one of their organisations' top priorities in the next year, with one-third citing supply chain disruption as a pressing issue. Due to mounting pressure from diverse stakeholder groups, businesses must pivot towards a new operational paradigm by enhancing operational excellence and industry collaboration and leveraging technology to improve traceability and insight in supply chain management.

Edward Au, Southern Region managing partner of Deloitte China, says, "In light of the global focus on climate change and sustainability, businesses worldwide are increasingly moving to integrate ESG considerations into their business strategies, risk management, and governance frameworks. Following the introduction of the HKEX's ESG Reporting Guide, we have witnessed an increase in demand for supply chain sustainability solutions over the years, driven by evolving stakeholder expectations, the wider scope of sustainability regulations and convergence in reporting standards."

In March 2024, the HKSAR Government issued its Vision Statement on Turning Obligations into Opportunities in Developing the Sustainability Disclosure Ecosystem in Hong Kong, which emphasises the city's aim to align its local sustainability disclosure requirements with the International Sustainability Standards Board (ISSB) Standards. A month later, the Stock Exchange of Hong Kong published its consultation conclusions on the enhancement of climate-related disclosure requirements for listed companies in Hong Kong.

"As government initiatives including China's '3060' goals and Hong Kong's Climate Action Plan 2050 are expected to drive market and regulatory shifts around sustainability disclosure, businesses need to reimagine supply chain models, with responsibilities and opportunities for sustainable value creation, expanding upstream and downstream beyond their immediate operations along with other material environmental and social governance concerns," adds Edward Au.

From a supply chain perspective, shifting regulations and behaviours among stakeholders could result in product and service alterations, lost asset values and market dislocation if not properly managed. These supply chain concerns arising from ESG factors have highlighted the urgency for governance professionals to manage a wide range of risk profiles, covering policy, disclosure and compliance, technology, reputation, financial and physical.

David Simmonds, FCG HKFCG, President of The Hong Kong Chartered Governance Institute; and Chief Strategy, Sustainability and Governance Officer of CLP Holdings Limited, says, "Supply chain management is an increasingly important aspect of sustainability governance. Regulatory requirements are growing along with the attention of investors, customers and other stakeholders. From a strategic standpoint, companies should be able to demonstrate operational resilience through effective knowledge and management of supply chain risks. In light of this, it is crucial that people in charge of supply chain management, including boards, senior management and governance professionals understand all material components of a supply chain rather than focusing only on issues that are currently topical."

To address the Scope 3 challenge, the paper recommends that governance professionals adopt a comprehensive approach that involves identifying emission sources, setting meaningful reduction targets, collaborating with suppliers to decarbonise, and tracking progress. As organisations advance in Scope 3 emissions understanding, they transition from spend-based to activity-based reporting approaches. Accessing supplier-provided, activity-level emissions data enhances the accuracy of over-generalised emissions factors applied to spending.

Ernest Lee, FCG HKFCG(PE), Immediate Past President of The Hong Kong Chartered Governance Institute; and Technical partner of Deloitte China, says, "While many supply chain transformation initiatives have historically been reactive, today, a growing number are being driven by a proactive desire to outperform competitors. Despite the potential risks and challenges, supply chain transformation has the potential to deliver vast opportunities for sustainable value creation."

"Building a sustainable and resilient supply chain bolsters a company's ability to weather volatility and enhances its capacity for growth and profitability. To initiate a successful sustainable supply chain transformation, businesses must adopt a holistic approach by evaluating their performance across all material ESG aspects within key value chain functions. While defining a sustainability vision, a comprehensive understanding of regulatory requirements, industry benchmarks and the expectations of customers and investors is also crucial."

Click here to download the paper.