The need for swift and meaningful action on climate change is becoming increasingly clear, with the calls to action from the IPCC seemingly becoming more urgent with the release of each new report. Efforts must be made across the entire economy to achieve the level of decarbonisation needed to limit the negative impacts in the timeframe needed. This will only be possible through industry-wide collaboration and incentives that span the whole value chain. Scope 3 emissions, defined as all indirect emissions occurring in the value chain of a company, are therefore becoming an increasingly central component of the conversation around climate action. It is no longer possible to separate these indirect climate impacts of an organisation from discussions on corporate accountability.
Corporate recognition of this reality has begun to materialise in the past few years, as evidenced by the now relatively common “net-zero” messaging published by companies across a range of geographies and industries. According to the Net Zero Tracker, 33% of the G20’s largest companies by revenue have set net-zero targets until 2050 and while net-zero pledges covered just 19% of the global economy in 2019, they now cover nearly 70%. Although there is variability on definitions of what it means to be “net-zero”, the significant uptick in the use of the term indicates that scope 3 emissions are now being brought into decarbonisation strategies, rather than being written off as outside of the spere of responsibility. The influential SBTi’s net-zero corporate standard requires that scope 3 emissions are incorporated in all long-term targets in order for the targets to be certified by the initiative.
Greenhouse Gas Protocol definitions of scope 1, 2 and 3 emissions
Direct emissions from owned or controlled sources
Indirect emissions from the generation of purchased energy
All indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.
Scope 3 emissions categories:
- Purchased goods and services
- Capital goods
- Fuel and energy-related activities
- Upstream transportation and distribution
- Waste generated in operations
- Business travel
- Employee commuting
- Upstream leased assets
- Downstream transport and distribution
- Processing of sold products
- Use of sold products
- End-of-life treatment of sold products
- Downstream leased assets
Source: Greenhouse Gas Protocol
Although scope 3 encompasses a wide range of emissions sources, from business travel to the use of sold products, arguably one of the most universally important areas of focus is “Category 1” emissions, those relating to purchased goods and services. CDP data shows that supply chain emissions are approximately 11.4 times higher than operational emissions on average.
In addition to the impact of absolute of emissions, engaging with supply chain emissions is important due to the positive knock-on effects. Incentivising suppliers to increase transparency and reduce emissions can have a greater effect than simply cutting operational emissions. CDP, a strong proponent of this so called “cascade effect”, highlighted the current low level of supplier engagement among CDP responders in its latest supply chain report: “on climate change, only 20% reported data for Scope 3 category 1 ‘Purchased Goods and Services’ emissions, and 62% aren’t engaging suppliers on the topic”. Given the magnitude of emissions and the apparent gap in action, it is clear that supply chain emissions will become an important area of focus over the coming years.
Benefits beyond accelerating decarbonisation
The benefits of engaging with supplier emissions have the potential to go much deeper than the already important outcome of providing much needed incentives for economy-wide decarbonisation. Just as proactively engaging with other forms of supply chain performance, interrogating the emissions performance of the supply chain can help to improve resilience, strengthen strategy and provide assurance to investors and other stakeholders.
- Scope 3 reporting and target setting as a hygiene factor
The ability to communicate the impact of the supply chain as part of a robust emissions decarbonisation strategy is well on its way towards becoming a requirement for large companies, both directly and indirectly. Increased harmonisation within the global sustainability reporting landscape has ushered in the adoption of requests for scope 3 emissions data by both voluntary and mandatory reporting standards globally. On the mandatory side, in the USA the Securities and Exchange Commission (SEC) has recently included plans to phase-in scope 3 emissions disclosure requirements under its proposal to enhance climate-related disclosures, and a new EU Due Diligence regulatory proposal is set to emphasise the role of reporting on the impacts of the value chain. Both proposals, in addition to the requirements set out in the Corporate Sustainability Reporting Directive (CSRD), also stress the need for disclosure relating to strategy, business model and outlook, indicating that in addition to scope 3 data, robust plans to engage with and reduce supply chain emissions will be required. Indirectly, corporates are likely to face increased data demands from European investors, with the Sustainable Finance Disclosure Regulation (SFDR) to require some funds to disclose scope 3 emissions from January 2023.
- Risk management and increased resilience
Understanding the emissions footprint of a supply chain adds yet another lens to analyse risk, resilience and efficiency. Identifying the most significant emissions sources in the supply chain can help to identify sources of inefficiency or increased transition risk. Acting to reduce carbon-related inefficiencies may have economic benefit in the short-term, while identifying lagging or high-impact suppliers early may offer long-term protection against the increased future costs or supply chain breakdown in the long-term as a result of unmanaged transition risks.
- Harnessing opportunities
When fully integrated into strategy and business development, engaging with supply chain emissions may act as an identifier for areas of innovation and opportunity, both internally and externally. Understanding supply chain inefficiencies or emissions hotspots may help to highlight potential areas for product development or redesign that could have economic and reputational benefits, such as the reduction or replacement of high-impact materials. Furthermore, analysing the supply chain in such a way can lead to the identification of emerging technologies or supplier initiatives. Identifying such opportunities early and engaging directly with suppliers may open the door for collaboration, innovation and potential partnerships – a factor that is also increasingly being looked at and rewarded by investors.