How to Understand ESG Reports

Fashion companies are mandated to report their sustainability efforts and progress. Since the reporting on these parameters has been introduced only a few years ago, each company’s reporting methodology differs. Unlike financial reporting, there is no global standardization for ESG reporting. However, there are some indicators that do overlap across the industry, one of them being progress on Scope 1, 2, and 3 emissions. The Greenhouse Gas (GHG) Protocol defines Scope 1, 2, and 3 emissions.

The GHG Protocol is a widely recognized global standard for measuring and managing greenhouse gas emissions. It was developed through a partnership between the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). The GHG Protocol provides frameworks for governments, businesses, and other organizations to measure and report their GHG emissions consistently, promoting transparency and accountability in climate impact reporting. These standards are used by many international sustainability initiatives and regulations.

Scope 1 Emissions (Direct emissions)

These are direct GHG emissions from sources that are owned or controlled by an organization.

Examples:

• Fuel combustion in company-owned vehicles
• On-site fuel combustion (e.g., in factories or offices)
• Emissions from industrial processes directly controlled by the company

Scope 2 Emissions (Indirect emissions from energy consumption)

These are indirect GHG emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the organization. Even though the company does not directly generate these emissions, they are responsible because they use the energy.

Examples:

• Purchased electricity to power buildings or factories
• Purchased steam or heating/cooling

Scope 3 Emissions (All other indirect emissions)

These are indirect GHG emissions that occur in the value chain of the reporting company, including both upstream and downstream activities. Scope 3 often represents the largest share of a company’s carbon footprint and includes emissions not directly controlled by the company but caused by its activities.

Examples:

• Emissions from the production and transportation of raw materials
• Emissions from the use of sold products (e.g., fuel burned in cars manufactured by an automotive company)
• Business travel, employee commuting, waste disposal, and the transportation of goods

Quick Definition of GHG Emissions

• Scope 1: Direct emissions from owned or controlled sources.
• Scope 2: Indirect emissions from purchased energy.
• Scope 3: Indirect emissions from the broader value chain (upstream and downstream activities).

Scope 3 is often the most complex to calculate and manage, but it is critical for comprehensive sustainability reporting.

Reporting Emissions

Most companies have made strides in decreasing emissions under Scope 1 and 2. These usually make up a much smaller proportion of the company’s emissions and are much easier to measure as well as control since they are directly within the control of the company. Scope 3 emissions, on the other hand, are much higher and are also harder to decrease as they include the entire supply chain from raw materials procurement to product after-life. Upstream activities relate to the sourcing, production, and transportation of materials and services the company uses. Downstream activities refer to how the company’s products or services are distributed, used, and disposed of after being sold.

Another factor to take into account while understanding the reporting of Scope 1, 2, and 3 emissions is the baseline year the company uses for measurement. A baseline year for greenhouse gas (GHG) emissions refers to a specific year chosen by a company or organization as a reference point against which future GHG emissions will be measured. The emissions in this year serve as a benchmark for tracking progress in reducing emissions over time.

For instance, companies like LVMH, Coty, Inc., Prada, Hugo Boss, etc. consider 2019 as their Baseline Year. Kering Group uses their measurements from 2015 as their baseline, whereas Valentino has reported their latest emissions for 2022 against their 2021 emissions. This greatly impacts the reporting and makes it difficult to make a straightforward comparison of the progress made by different companies. Simply put, a company comparing against 2015 will be able to show greater reductions in emissions in terms of percentage, whereas if a company compares to the previous year, it may show a lower percentage of reduction in emissions.

Additionally, many companies are also including in their reports their future goals for the different emission levels. This is reported in the same way as already accomplished reductions, meaning they mention their percentage reduction goal against a baseline year and by when they strive to achieve it.