Hannah Simons

Head of Sustainability, Lloyds Bank Corporate Markets

Hannah joined LBCM in 2023 as Head of Sustainability. In her role, Hannah supports LBCM’s clients to build sustainable financing solutions relevant to their individual needs. She also works closely with colleagues across the wider Lloyds Banking Group to support the delivery of our own sustainability objectives. Hannah joined from Schroders where she was Head of Sustainability Strategy.

In her role, she supported clients in embedding sustainability into their investment strategy and developed a cohesive range of sustainable investment products to meet client needs. Earlier in her career, Hannah worked at BlackRock, PIMCO and Schroders supporting institutional investors in designing bespoke investment solutions, aligned to their long-term objectives.

Over the past few years, companies across every industry have made sustainability commitments ranging from diversity targets through to transitioning their business to net zero.

Today, the focus is firmly on how to deliver on these pledges. Over this period the role that the Chief Operating Officer (COO) plays in this transformation has gathered momentum recognising the complex challenge it represents to all businesses.

As the focus of action evolves into supply chain considerations, the COO office is central to delivering successful decarbonisation commitments. In many financial institutions, the COO has ultimate responsibility for the supplier relationship. In this article we share a checklist for COO’s and their supply chain management teams to support them as they establish engagement programmes to manage value chain emissions.

Moving beyond financed emissions

For those in the financial services industry, it is widely acknowledged that they play a crucial role in supporting the global decarbonisation pathway. Financial services participants have come together under initiatives such as the Glasgow Financial Alliance for Net Zero[1] (GFANZ), to support the transition to net zero by 2050 and help achieve the objectives of the Paris Agreement. With membership of this alliance standing at over 675[2] firms spanning more than 50 countries, member organisations are beginning to communicate their transition plan to achieve net zero.

Scope 3 emissions dominate. CDP[3] estimates that across all sectors, they account for 75% of emissions. For the financial service sector, the number is far higher. Based on data gathered in 2021, Scope 3 accounts for 99% of total emissions. The significant majority of Scope 3 emissions sit in category 15, referred to as ‘financed emissions’.

For asset managers, these are the emissions arising from portfolio holdings. For banks, on balance sheet lending is the main contributor. Through membership of industry-led alliances such as the Net Zero Asset Managers Initiative and the Net Zero Banking Alliance, many financial services companies have established ambitions around the future level of financed emissions. Other Scope 3 categories can, however, be meaningful, especially those relating to suppliers. These are captures in Scope 3, category 1: purchased goods and services. It is in this area that the COO can drive momentum.

The regulatory push

In a bid to further enhance transparency, regulators are also asking questions about supply chains. Recent developments including the EU’s Corporate Sustainability Due Diligence Directive[4] (CSDDD), which was formally approved by the Council of the European Union in May 2024, are likely to be transformative.

CSDDD aims to promote sustainable and responsible corporate behaviour in companies’ across both their operations and value chain. Once CSDDD becomes mandatory, in scope companies will be required to identify and address adverse human rights and environmental impacts of their actions inside and outside Europe. The availability and quality of sustainability related data is also likely to improve.

Where to start

Supply chain emissions result from the purchase of goods and services across a diverse range of categories from IT software and hardware through to consultancy services. Companies, often led by the COO office, are beginning to proactively engage with suppliers to reduce these emissions to align with the net zero goals they have established.

The old adage states ‘what gets measured gets managed’. The starting point of a supply chain programme is therefore to calculate and disclose Scope 3 supply chain emissions. Increasingly regulations around the globe are mandating this disclosure. Gathering this data can be challenging as the activities occur outside your own operations and may involve many suppliers.

The calculations for value chain emissions are involved a great starting point is the guidance offered by the Greenhouse Gas Protocol[5]. This suggests beginning with the ‘spend-based’ method. This approach takes the total spend with each supplier of a good or service and multiplies it by an emission factor. It provides you a broad overview of your company’s emissions, allowing you to identify the biggest contributors to your supply chain emissions.

Building an effective supply chain engagement programme

Here’s where the COO comes in, we highlight four key aspects to the role:

• Focus on your key suppliers. It’s likely that you will have hundreds, if not thousands of companies in your supply chain. With supply chain emissions calculated, identify the largest suppliers and those that contribute the most to your overall emissions. This will typically be a much smaller, and therefore, manageable number of suppliers to engage with. It will also have the biggest impact on managing overall emissions.

• Establish targets. It’s important to communicate clearly with your suppliers on why you are establishing targets, explain how they fit into your own transition plan. Some suppliers may already have a plan to reduce emissions and be making good progress. Others, particularly smaller companies, may be earlier in their journey so good communication will help ensure a successful supplier engagement.

• Support suppliers in developing a plan. Depending on where your suppliers are on their journey, you may need to engage with them in a variety of ways. Ranging from educational programmes involving sharing best practice on how to address emissions reduction, evolving procurement practices to prioritise suppliers that meet stretching sustainability criteria, through to requiring suppliers to disclose their emissions. For example, you might ask suppliers to set a net zero commitment and submit an annual public response to CDP’s climate change questionnaire. It is likely the programme will need to flex, particularly in the early days and for smaller organisations.

• Regular dialogue. Effective communication and feedback throughout the programme is key. Suppliers in early stages will benefit from information-sharing sessions such as webinars. Highlighting where suppliers can go for further help is also valuable. Finally, monitoring progress and celebrating success with those suppliers on track to reduce emissions will ensure a successful programme.

A case study: Lloyds Banking Group’s Emerald Standard[6]

We launched the Emerald Standard which, aligned to the Group’s own sustainability ambitions, sets clear environmental and social expectations of our suppliers that we ask them to work towards. A core part of this is the engagement we have with our key suppliers to drive adoption of our standard. We focus on our suppliers who make the biggest contribution to our supply chain emissions, around 150 relationships cover 80% of our emissions and spend. Under our Emerald Standard, we ask our suppliers to:

• Participate in the annual CDP climate change questionnaire, disclosing Scope 1, 2 and applicable Scope 3 emissions. We have a minimum expected score.

• Make a public stated ambition to achieve net zero by 2050 with interim targets.

• Set science-aligned targets, reducing emissions in line with limited global warming to 1.5OC.

• Have a valid EcoVadis ESG scorecard (or similar) with minimum standards required.

Today, around a quarter of our suppliers meet the requirements of our Emerald Standard. Core to the successful delivery of this programme is the support we offer our suppliers through both individual and collective training. Through engaging with our suppliers we understand the current alignment with our requirements and also identify future plans to meet it where they fall short.

The journey has started

As the financial services sector looks to deliver on its net zero commitments, managing supply chain emissions has never been more critical. Everybody at the firm has a vested interest in how to manage climate related risks. For COO’s addressing the largest value chain emissions makes good financial sense and is evidence of the further evolving role amongst c-suite leaders.

Building an effective supply chain engagement programme is key to hitting net zero commitments. At the heart of any successful programme is engagement, COOs are uniquely placed to lead colleagues in their own sustainability journey.

Jargon buster:

Scope 1 Emissions: These are direct emissions that come from sources owned or controlled by a company. Examples for financial services include the emissions generated from office building heating systems. Essentially, these are emissions that occur within the company’s own operations and facilities.

Scope 2 Emissions: These are indirect emissions resulting from the generation of purchased energy. For financial services companies, these emissions arise from the power needed to support the organisations office network. It’s important to note that these emissions occur outside the company’s direct control but are still related to its energy consumption.

Scope 3 Emissions: These are all other indirect emissions in a company’s value chain. Unlike Scopes 1 and 2, which focus on the company’s own operations, Scope 3 emissions encompass a broader range of activities. For example, from buying products from its suppliers, and from its products when customers use them. Emissions-wise, for financial services companies, category 15 ‘investments’ represents the largest contributor to overall emissions.

[1] Glasgow Financial Alliance for Net Zero (gfanzero.com)

[2] About Us | Glasgow Financial Alliance for Net Zero (gfanzero.com) Data as of May 2024, updates available via GRANZ website).

[3] CDP-technical-note-scope-3-relevance-by-sector.pdf

[4] Corporate sustainability due diligence – European Commission (europa.eu)

[5] Corporate Value Chain (Scope 3) Standard | GHG Protocol

[6] lloydsbankinggroup.com/assets/pdfs/investors/financial-performance/lloyds-banking-group-plc/2023/q4/2023-lbg-sustainability-report.pdf