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The supply chain is like the last frontier of emissions accounting. Most companies that track and manage emissions tackle the low-hanging fruit first – emissions from their own operations. Not many are brave enough to venture deep into the supply chain, but those who do find potentially significant rewards in emissions reduction opportunities.
In this article, we explain why monitoring your supply chain emissions is important and how to go about doing it.
There are three types of emissions – Scope 1, Scope 2, and Scope 3, all defined below. The language and methodology for emissions tracking are quite standardised in carbon accounting, originating from the Greenhouse Gas (GHG) Protocol, so these three categories are universally understood regardless of the wider framework you use to report other ESG aspects.
Scope 1 – Direct emissions from manufacturing, services, and owned sources, including emissions from fleets and generators and the use of chemicals.
Scope 2 – Emissions from purchased electricity used for internal operations.
Scope 3 – Indirect emissions from upstream and downstream activities.
A company’s total emissions are Scope 1, 2, and 3 combined. Scope 3 is what is referred to as supply chain emissions – emissions distributed along the value chain which can be very localised or hyper-globalised.
Companies outsource a great number of activities, resulting in most emissions associated with the production and delivery of goods or services being buried deep within supply chains. It’s convenient to simply forget or dismiss the emissions in supply chains while companies mind their own operational footprint. But the excuse that the supply chain is beyond the operational control of large companies can no longer fly in today’s regulatory environment.
Tracking emissions in the supply chain is necessary to meet these new regulations. It is also necessary for a low-carbon transition. Up to 75% of a company’s total emissions come from the supply chain.1 Realistically, given these numbers, achieving decarbonisation is impossible without reducing supply chain emissions.
Corporate net-zero ambition must address the elephant in the room: Scope 3 emissions. With more than one-third of the world’s largest listed companies having pledged to achieve net-zero (often by 2050 in line with the Paris Agreement targets).
Many are already laying the groundwork for base lining Scope 3 emissions in an attempt to progressively measure and manage supply chain emissions.2 Not to mention, having a solid grasp of your supply chain emissions will open up a world of financing opportunities for climate-conscious investors looking for low-carbon investments.
In Germany, where the Supply Chain Due Diligence Act entered into force on the 1 January 2023, companies now face penalties for pollution or human rights violations that occur in their supply chain. The EU has also adopted a directive on corporate sustainability due diligence, targeting environmental and human rights standards in company supply chains. This reflects a trend towards stronger accountability for ESG in general.
Regulations related to emissions disclosures are quickly becoming the norm, too. The UK has made climate transition plans mandatory for listed companies. On top of that, TCFD reporting is also mandatory.
Following in the UK’s footsteps, the US Securities and Exchange Commission (SEC) is deliberating a proposed law to make climate disclosures mandatory, which would require reporting on Scope 3 emissions. Other countries have implemented carbon pricing for companies that produce emissions in excess of the allocated cap. For a carbon tax to work, there must be transparency in the supply chain.
Tracking Scope 3 emissions is a detailed process which can get quite technical when you get into it. The GHG Protocol is the predominant resource that you want to refer to, specifically the Corporate Value Chain (Scope 3) Accounting and Reporting Standard (the only internationally recognised standard for supply chain emissions accounting).
Its framework also provides recommendations on working with suppliers to achieve emissions reduction goals. This can be supplemented with the Scope 3 Calculation Guidance. It is a technical document that details the following:
A full Scope 3 assessment will entail engaging with your supply chain to obtain the relevant data on their emissions. This process can be complex for companies with multiple suppliers and tiers of suppliers. We recommend working with a consultant, although the resources above are suitable for in-house carbon accounting, too.
At the risk of glazing over the details, the basic steps to tracking supply chain emissions are:
Expect steps #1 and #3 above to consume most of your time and energy, as these are tedious processes involving a lot of back-and-forth communication and numbers crunching. This is where the bulk of Scope 3 measurement and monitoring takes place. If you want to take ownership of supply chain emissions, you should have a firm handle on the data sources as well as a clear engagement strategy that paves the way for further cooperation with your suppliers. Tracking supply chain emissions is the first step to reducing your carbon footprint and mitigating climate impacts. Make sure you get it right by following the steps above and getting help where needed.