A recent report on Scope 3 emissions highlights a critical but often overlooked aspect of corporate climate strategy: the carbon footprint embedded in supply chains. The findings reveal that supply chain emissions are 26 times higher than a company's direct operational emissions. This staggering figure underscores companies’ need to broaden their focus beyond direct emissions (Scopes 1 and 2) to include those occurring upstream in their supply chains.
The Scope 3 emissions challenge
Scope 3 emissions, encompassing all indirect emissions in a company’s value chain, present unique challenges. For instance, the report highlights that upstream emissions from manufacturing, retail, and materials sectors alone account for 1.4 times the total CO2 emitted in the EU in 2022. However, only 15% of corporates have set upstream scope 3 targets.
Why is there such a gap in action? The complexity and scale of managing Scope 3 emissions contribute significantly to this shortfall. Companies often need more visibility and transparency in their supply chains, making obtaining accurate emissions data from suppliers difficult.
Moreover, setting and achieving these targets requires extensive coordination and collaboration across the supply chain, which can be daunting. Additionally, many organizations prioritize managing direct emissions due to more apparent regulatory requirements and more manageable scopes.
Key factors for driving scope 3 action
The report identifies three critical factors to catalyze action on Scope 3 emissions: a climate-responsible board, engaging suppliers, and adopting internal carbon pricing.
1. Climate-responsible boards
A climate-responsible board is essential for embedding climate strategy and accountability within an organization. Companies with such boards are 4.8 times more likely to set upstream Scope 3 targets. This correlation is due to a board's ability to prioritize and support climate-related goals, ensuring that management implements practical actions.
2. Engaging suppliers
Supplier engagement is vital for extending a company’s climate ambitions throughout its supply chain. The report notes that companies engaging with their suppliers are 6.6 times more likely to have a 1.5°C-aligned transition plan. Improving supplier engagement involves:
- Creating transparency around suppliers’ emissions.
- Requiring them to report data.
- Setting clear expectations for emission reductions.
Companies can leverage their purchasing power to drive change by offering incentives for suppliers to adopt low-carbon technologies or practices.
3. Internal carbon pricing
Adopting internal carbon pricing is another powerful tool for managing Scope 3 emissions. Despite its benefits, only 14% of corporates currently use it. Internal carbon pricing helps integrate the cost of carbon into business decisions, encouraging the adoption of low-carbon technologies and practices by making them financially preferable. It provides a financial incentive to reduce emissions and can drive more climate-aligned decision-making.
Overcoming data collection challenges
Collecting accurate and quality data is one of the most significant hurdles in managing Scope 3 emissions.
Common issues include:
- Incomplete or inaccurate supplier data.
- Inconsistent reporting standards.
- The complexity of tracking emissions across extensive supply chains.
To address these challenges, companies can:
- Standardize Reporting: Implement standardized reporting frameworks like the Greenhouse Gas Protocol to ensure consistency.
- Improve Data Collection Methods: Invest in advanced data collection tools and technologies, like analytics or third-party verification services, to enhance data accuracy.
Strengthen supplier relationships:
- Build stronger relationships with suppliers.
- Provide guidance and support.
- Integrate climate criteria into procurement practices.
The role of investors
Investors also have a significant role in addressing Scope 3 emissions. They can influence corporate action by demanding transparency and action on these emissions, which includes requiring companies to disclose their Scope 3 emissions and integrating climate risk into their investment decisions. Tools like the Climate-Adjusted Capital Asset Pricing Model (CAPM) can help investors price climate risks, promoting more informed and responsible investment practices.
Moving forward
Addressing Scope 3 emissions requires a comprehensive and collaborative approach. Companies must engage deeply with their supply chains, integrate climate considerations into their governance and decision-making processes, and invest in better data and reporting practices. While challenging, these steps are crucial for meaningful climate action and reducing the substantial carbon footprint embedded within supply chains.
As the report underscores, the time for companies to act on Scope 3 emissions is now. Businesses can significantly reduce their carbon footprint and contribute to global sustainability efforts by focusing on these critical areas.
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Source:
1. CDP and Boston Consulting Group (BCG), " Big challenges, simple remedies." https://www.cdp.net/en/supply-chain/cdp-bcg-scope-3-report
