Lego, of the world largest toy manufacturerhas not only built a reputation for the durability of its stonesdesigned to last for decades, but also because of the substantial investments in sustainability. The company has promised $1.4 billion to reduce CO2 emissions by 2025, despite offsetting annual profits of just over $2 billion in 2022.
This dedication isn’t just for show. Lego considers children and their parents as its core customers sustainability is essentially about ensuring that future generations inherit a planet that is as hospitable as the one we enjoy today.
This ambitious project aimed to replace traditional Lego plastic with a new material made from recycled plastic bottles. However, when Lego assessed the environmental impact of the project across its supply chain, it concluded that producing bricks with recycled plastic would requires additional materials and energy to make them durable enough. Because this conversion process would result in higher CO2 emissions, the company decided to stick with current fossil fuel-based materials for the time being continue searching for more sustainable alternatives.
If experts in global supply chains And sustainabilityWe believe Lego’s pivot is the start of a larger trend toward developing sustainable solutions for entire supply chains in a circular economy. New regulations in the European Union – And expected in California – are about to speed things up.
Investigate all emissions, from cradle to grave
Business leaders are increasingly so integrating environmental, social and governance factors, better known as ESG, in their operational and strategic frameworks. But the pursuit of sustainability requires attention to the entire life cycle of a product, from its materials and manufacturing processes to its use and final disposal.
The results can lead to counterintuitive results, as Lego discovered.
To understand a company’s full carbon footprint, it needs to be looked at three types of emissions: Scope 1 emissions are generated directly by a company’s internal activities. Scope 2 emissions are caused by generating the electricity, steam, heat or cooling that a company uses. And scope 3 emissions are generated throughout a company’s supply chain, from upstream suppliers to downstream distributors and end customers.
Currently, less than 30% of companies report meaningful scope 3 emissions, partly because these emissions are difficult to track. Yet the scope 3 emissions of companies are average 11.4 times bigger then them scope 1 emissions, corporate disclosure data reported to the nonprofit CDP show.
Lego is a case study of this skewed distribution and the importance of tracking scope 3 emissions. A staggering one 98% of Lego’s CO2 emissions fall under scope 3.
From 2020 to 2021, the company’s total emissions increased by 30% amid rising demand for Lego sets during COVID-19 lockdowns – even as the company’s Scope 2 emissions related to purchased energy fell , such as electricity, by 40%. The increase was almost entirely due to scope 3 emissions.
As more companies follow in Lego’s footsteps and start reporting scope 3 emissions, they will likely find themselves in the same position, realizing that efforts to reduce carbon emissions often come down to supply chain emissions and consumer use. And the results could force them to make some tough choices.
Policy and disclosure: the next frontier
New regulations in the European Union and under preparation in California aim to increase transparency of corporate emissions by including emissions in the supply chain.
The EU adopted the first set of European sustainability reporting standards in June 2023, requiring listed companies in the EU to to disclose their scope 3 emissionsbeginning in their fiscal year 2024 reports.
The California Legislature similar legislation passed requiring companies with revenues over $1 billion to disclose their scope 3 emissions. California’s governor has until October 14, 2023 to consider the bill he is expected to sign it.
At the federal level, the U.S. Securities and Exchange Commission released a proposal in March 2022 that, if finalized, would require all listed companies must report climate-related risk and emissions data, including scope 3 emissions. After suffer significant setbacksthe SEC began to reconsider the Scope 3 reporting rule. But SEC Chairman Gary Gensler suggested during a congressional hearing in late September 2023 that California should take a step could influence the decision of federal regulators.
This increased focus on disclosure of scope 3 emissions will undoubtedly increase pressure on companies.
Because scope 3 emissions are significant but often not measured or reported, consumers are right to be concerned that companies that claim to have low emissions could be greenwashing without taking action to reduce emissions in their supply chains to combat climate change.
At the same time, we suspect that as more investors support sustainable investing, they may prefer to invest in companies that are transparent in disclosing all emission areas. We believe that consumers, investors and governments will ultimately demand more than lip service from companies. Instead, they expect companies to take actionable steps to reduce the largest part of a company’s carbon footprint – scope 3 emissions.
A journey, not a destination
The Lego example serves as a cautionary tale in the complex ESG landscape for which most companies are not well prepared. As more companies come under scrutiny for their entire carbon footprint, we may see more cases where well-intentioned sustainability efforts run up against inconvenient truths.
This requires a nuanced understanding of sustainability, not as a checklist of good deeds, but as a complex, ongoing process that requires vigilance, transparency and, above all, commitment to the well-being of future generations.