by: Antoine Kunsch | March 20, 2024
In striving for climate goals, companies must effectively map, measure, and track emissions from their supply chain, also known as upstream Scope 3 emissions. Given that supply chain emissions typically exceed operational emissions by a factor of more than eleven [1], the shift towards a low-carbon economy inherently involves transitioning to a low-carbon supply chain.
Regulatory Pressure Is Mounting for Companies to Measure Their Supply Chain Emissions
In Europe and the U.S., regulators and policymakers are advocating for and passing legislation to increase diligence and transparency regarding supply chain emissions. Earlier this year, the Corporate Sustainability Reporting Directive (CSRD) went into effect, intending to mandate granular emissions disclosure and establish emission reduction targets across Scopes 1, 2, and 3. A subsequent set of standards, expected to be adopted in June 2024, will emphasize the significance of Scope 3 emissions in measuring social and environmental impact. Similarly, in California, SB 253 [2] will require public and private companies above a specific revenue threshold to disclose their Scope 3 emissions starting in 2027. Moreover, the SEC Proposed Climate Risk Disclosure Rule anticipates including requirements for disclosure of Scope 3 emissions [3]. This growing momentum toward a more comprehensive disclosure of Scope 3 emissions reflects a global trend toward increased scrutiny and more effective reporting of supply chain emissions.
Reporting on High-Impact Scope 3 Categories Is Challenging but Crucial for Effective Mitigation
According to the 2022 CDP Supply Chain Report, only 41% of companies that disclosed data reported emissions related to one or more Scope 3 categories. In addition, among the companies reporting on at least one Scope 3 category, the tendency is to focus on less high-impact yet more manageable categories, such as Business Travel (Category 6), rather than more complex ones. High-impact categories like Purchased Goods and Services (Category 1) often pose challenges for reporting companies. They can be difficult to measure as they rely on partial and low-granularity data. They are, however, critical in developing effective strategies to achieve climate goals. Investors and stakeholders increasingly demand comprehensive reporting across all three Scopes for informed decision-making and risk management. The ability to map, measure, and track Scope 3 emissions is progressively emerging as a determining factor in evaluating an organization’s overall performance and risk exposure within sustainability frameworks.
Developing a Supplier Engagement Program to Increase Data Quality and Drive Financial Performance
Beyond this global surge in regulatory demands and the materiality of supply chain emissions for most organizations, developing a supplier engagement program can be instrumental in mitigating various physical, reputational, and technological risks. This involves a strategic approach to collaborating with suppliers to improve transparency, relationships, and resilience within supply chains while reducing risks and advancing sustainability practices.
Is there a link between the ESG risk in a company’s supply chain and that company’s financial performance? According to recent research conducted by the HKU Business School [4], companies that rely on more responsible suppliers than their counterparts tend to yield greater stock returns in the subsequent years. Despite this large-scale evidence and the growing expectations for companies to assess the ESG performance of their supply chain, organizations continue to grapple with the complexity of establishing programs and setting up targets that have the potential to drive meaningful impact.
How to Build a Sustainable Supply Chain Program
To develop a sustainable supply chain program, the following steps are essential:
- Data Collection. Understanding the available data to measure the impact is the first step. This often requires input from multiple departments to gather accounting and expense data for calculating emissions following a supplier-specific or spend-based approach or a combination of both. This phase will inform the choice of methodology and serve as a baseline for future exercises.
- Impact Measurement. Following data collection, companies can use methodologies set by the GHG Protocol to measure their emissions for relevant Scope 3 categories. Important aspects to consider during this phase include:
- Deciding on the best-adapted methodology for this reporting period
- Identifying relevant sources of secondary data (e.g., emission factors)
- Accurately categorizing emissions (e.g., upstream vs. downstream emissions).
With these questions answered, companies can start reporting their supply chain emissions and document their methodology. It is not uncommon for companies to update their disclosure and restate emissions from previous reporting cycles with an improved methodology.
- Supplier Engagement and Target Setting. With a better understanding of their impact, companies can engage with their critical suppliers to set engagement and/or reduction targets. Engagement targets are usually easier to track as they focus on tracking if suppliers have set goals regarding their GHG emissions, whereas reduction targets focus on absolute GHG emissions reduction. A robust supplier engagement program should include supply partners with significant contributions to relevant Scope 3 categories.
- Capacity Building and Progress Communication. By working with suppliers on climate goals, companies can improve the quality and accuracy of their ESG disclosure and create opportunities for innovation and further collaboration on decarbonization initiatives. Active collaboration between a company and its suppliers can improve the granularity and quality of emissions data and create a more resilient supply chain.
In summary, building a sustainable supply chain program involves data collection, impact measurement, supplier engagement, target setting, capacity building, and progress communication. These steps are crucial for companies aiming to enhance the sustainability of their supply chains.
ClimeCo supports clients in their efforts to develop a sustainable supply chain program. To learn more, please email us at info@climeco.com.
[1] CDP – Global Supply Chain Report 2022
[2] California Legislative Information – SB-253 Climate Corporate Data Accountability Act
[3] U.S. Securities and Exchange Commission – Climate-Related Disclosures/ESG Investing
[4] Lin, She, Yoon, Zhu – Shareholder Value Implications of Supply Chain ESG
About the Author
Antoine Kunsch specializes in life cycle assessments (LCA), sustainable supply chains, and decarbonization pathways. Antoine holds a Master of Environmental, Economic, and Territorial Sciences from the University of Versailles Saint-Quentin and a dual Bachelor of Science from the University of Kingston London and the SKEMA Business School.
