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.