The largest proportion of the average company’s carbon footprint is imposed by its suppliers. How should firms go about cutting CO2 emissions that are beyond their direct control?
Until recently, businesses have focused on their own operations in the effort to cut their greenhouse gas emissions, yet it’s becoming abundantly clear that the vast majority of the average firm’s carbon footprint is created in its supply chain.
Data from Carbon Tracker, a think-tank researching the effect of climate change on the financial markets, suggests that between 80% and 97% of a company’s total carbon footprint lies in the scope-three category. This encompasses the CO2 emissions of its suppliers and also of downstream activities such as the consumption of its products and their end-of-life treatment.
Moreover, the Net-Zero Challenge report published by the World Economic Forum and the Boston Consulting Group in January concluded that the supply chains of some key consumer-facing industries are responsible for more than half of all global greenhouse gas emissions.
As Tyler Chaffo, manager of global sustainability at packaging company Avery Dennison, observes: “It’s very challenging to achieve net zero if you’re failing to quantify your biggest contributor.”
Sanjay Sadarangani, global head of sustainability, global trade and receivables finance at HSBC, agrees. He notes that the public’s improving awareness of climate change and its causes is putting ever-increasing pressure on governments, companies and the financial sector to take remedial action.
Likewise, environmentally conscious consumers “want to make informed choices about the clothes they wear and the food they consume. Suppliers that don’t put in measures to address all their CO2 emissions will see diminishing demand for their goods and services, either because their consumers won’t accept their products or because of regulations such as the UK’s ban on the sale of new petrol and diesel vehicles from 2030.”
Aside from environmental reasons, the costs of inaction are increasing, adds Alex Saric, chief marketing officer at Ivalua, a provider of supply management software. “If organisations can’t assess their suppliers’ environmental impact, they may lose out to greener rivals, face reputational damage or risk non-compliance as new regulations come into force,” he says.
Chaffo points to an estimate in February by the Carbon Disclosure Project (CDP) that “companies are facing up to $120bn [£87bn] in costs from environmental risks in their supply chains within the next five years. The risks for the company also apply to its suppliers, as these all roll up the value chain. Suppliers face the potential of lost revenue, regulatory pressure and enterprise risk for non-compliance. Suppliers and companies therefore need to collaborate to solve scope-three challenges.”
The first step in this process is to measure emissions and identify areas for improvement. This can be done using established standards such as the Greenhouse Gas (GHG) Protocol or by working with organisations such as the CDP through its supply chain programmes.
Sadarangani notes that the GHG Protocol is the only internationally accepted method for a company to account for its indirect emissions. This recommends that a firm “identifies which scope-three activities are expected to produce the most significant emissions, offer the most significant reduction opportunities and be most relevant to its business goals”.
American Express is in the process of setting official targets and measurements in aid of its carbon-neutrality plan, which encompasses scope-three emissions, according to its head of corporate social responsibility, Madge Thomas. These will be calculated in alignment with the GHG Protocol’s standard for corporate value chain accounting and reporting. The company’s calculations are independently checked according to the ISO 14064-3 standard, which specifies the requirements for third-party verifiers.
Thomas reports that American Express will measure and address indirect CO2 emissions in categories including: commuting and other business travel by employees; purchased goods and services; capital goods; fuel and energy-related activities; the use of sold products; and the end-of-life treatment of those products.
“We’re also planning to work with suppliers to invite them to track, reduce and eventually neutralise their operational greenhouse gas emissions,” she adds.
Saric notes that, if organisations are to effectively counter the threat of climate change and meet ever-increasing public expectations about sustainable business, measuring the impact of both their immediate and sub-tier suppliers is a must.
“Improving sustainability and achieving real change is not simply about choosing suppliers with more sustainable practices. It’s also about collaborating with them to make continuous improvements,” he stresses. “Organisations must work with suppliers in several tiers of the chain to find innovative ways to reduce their scope-three emissions.”
Businesses must also measure their emissions regularly, Saric argues. If they don’t make it a continuous process, they won’t be able to gauge their carbon footprint accurately enough over time and work effectively with their suppliers to reduce it.
“This collaboration is vital in benefiting business and the planet,” he says. “By establishing an ongoing dialogue with suppliers, companies will be able to identify new areas of innovation, improve efficiency and maximise their growth.”
Technology can help when it comes to improving cooperation in the value chain, says Sadarangani, who notes that several organisations have started using applications that enable the collection and analysis of data relating to their suppliers’ ESG performance. These applications feature self-assessment surveys for suppliers, which are required to upload documentary evidence to support their claims. The technology can also benchmark a supplier’s performance against that of peers in comparable industries, enabling users to identify areas where significant improvements could be achieved.
Chaffo believes that technology will play a key role in addressing emissions in the supply chain. This starts with an “initial quantification of an enterprise’s scope-three emissions but also includes identifying hot spots for reduction and, ultimately, implementing solutions. Now that we’re able to track at an item level the carbon footprint of a product as it moves through the supply chain, we’re able to provide brands and retailers with a more accurate picture of their scope-three emissions.”