Decarbonizing Supply Chains: The 3 Keys Steps to Scope… | ENGIE Impact

Decarbonizing Supply Chains: Three Key Steps to Scope 3 Emission Reductions

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Nik Bollons Senior Manager, Sustainability Solutions - UK & Ireland
Neetu Mysore Senior Manager, Sustainability Solutions - EMEA
Jamie Barsimantov Chief Strategy Officer & Co-Founder, Supply Shift
Stuart Poore Senior Director of Global ESG Cognizant
Carbon Emissions
Carbon Risk
Carbon Emission Regulation

The importance of decarbonizing a company's supply chain to reach Net Zero is well known. Indeed, many companies already have a high-level understanding of their supply chain emissions —Scope 3 greenhouse gas emissions (GHG) — and are engaging key suppliers on certain ESG (Environmental, Social & Governance) and compliance-related issues.

However, the sheer size of Scope 3 emissions (they tend to be 11x greater than energy-related emissions) and the complexity of collecting data from globalized supply chains not directly under a company’s control, create significant challenges for companies setting and delivering on their Scope 3 decarbonization targets. While Scope 1 and 2 energy-related emissions are more straightforward - if capital intensive - to decarbonize, Scope 3 emissions are inherently more complex and challenging.

Companies can take a number of simple, practical steps to measure their Scope 3 emissions footprint, engage with key suppliers and reduce value chain emissions. The process comprises taking the rough emissions estimates companies might already have and making them more granular, identifying hotspots and key suppliers, and then ultimately engaging those suppliers to reduce their emissions.

Along with Cognizant and our partner SupplyShift, we shared with participants at a recent webinar several strategies and learnings.

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Confronting the Data Gap

Scope 3 includes all the emissions a company’s value chain is responsible for: that is, the emissions associated with the raw materials, logistics, manufacturing, packaging, business travel, and consumer use and disposal of a product or service. Tackling emissions from suppliers is especially critical in the fight against climate change, in that they generally make up about 75% or more of a company’s total Scope 3 emissions. For example, Nestlé, the world’s largest food and beverage company, writes in its 2023 Net Zero Roadmap that Scope 3 emissions make up 95% of its total emissions, with sourcing of ingredients from suppliers responsible for more than 71% of that total.

Given the sheer scale of emissions from their supply chain, and with many companies having potentially thousands of suppliers in their constantly evolving and dynamic supply chain, tackling Scope 3 can seem like a Sisyphean task. Yet it is precisely because supplier emissions constitute such a large part of a corporate footprint that makes it crucial to set ambitious targets and commitments.

The challenge of reducing supply chain emissions is to find a workable strategy to address the complexity, diversity and changing nature of supply chains, the first and most important of which is a data gap.

The lack of robust, credible data about supply-chain emissions is perhaps the core issue businesses face in meeting their Scope 3 reduction objectives. Overcoming the data challenge was one of the main concerns participants shared in our Scope 3 webinar. They sought advice about best practices for engaging with suppliers to collect their emissions data, about enhancing the resolution and granularity of that data, ensuring its credibility, and about which strategies would best facilitate the process.

The recommended approach is to not let perfection be the enemy of progress. A company can make valuable progress even when they only have high-level, low-resolution supplier data and analytics to work with. And while enhancing supplier data collection and improving Scope 3 calculations are key, they should not delay early action to drive reductions down the supply chain.

Three Components of Supplier Decarbonization

The approach to decarbonizing supplier emissions is slightly different than Scopes 1 and 2, in that companies must not only align on a strategy internally but must also be capable of influencing and encouraging important value chain partners to drive emissions reductions in their own businesses – not just their own Scope 1 and 2 emissions, but also those of their supply chains (Scope 3). This cascading, second-tier complexity is particularly challenging.

Our pragmatic approach to a supply chain decarbonization strategy involves three components:

While companies progress through their supply chain decarbonization process at their own pace, they typically move through these three stages as they evolve from measurement to strategy to engaging the supply chain.

Measure and Launch with No Regrets

The aim here is to create a robust estimate of emissions across the company’s supply chain. In some cases, companies have not calculated their suppliers’ footprints and need to start from scratch. This typically requires a three-to-six-month discovery process including data collection, onboarding various internal data owners and identifying key suppliers to obtain better data. When a footprint already exists, we recommend companies use external experts to review the data and test the calculation methodology, establish a credible baseline, and define realistic reduction targets that can be tracked and verified.

In this first, foundational step, fostering collaboration across key internal stakeholders — including sustainability and procurement teams, regional or divisional leads, logistics and finance — helps ensure the critical alignment between emissions measurement and reduction goals, and overall business strategy, without which progress may falter.

To create momentum, a company should immediately implement proven initiatives without waiting for the precise measure of Scope 3 emissions. Immediate, no-regrets actions can be taken, such as conducting Life Cycle Assessments (LCAs) for key/top-selling products, encouraging the use of energy efficiency and management programs by suppliers in intensive energy-use sectors such as steel or cement, and implementing circularity and sustainability principles in product design and R&D. Doing so demonstrates early action to management, and signals your intentions across the supplier base.

Define and Design the Roadmap

Once a comprehensive estimate of a company’s supply chain emissions is established, it is vital to set ambitious yet achievable decarbonization targets. This provides a framework for action and a measure against which to track progress. Whether a provisional Scope 3 target is already in place or ambition needs to be increased to meet an independently validated science-based target, scenario analysis is essential for considering the impact of various factors on supply chain emissions.

For instance, companies should use dynamic tools (such as Power BI or proprietary software) to translate future business growth into emissions changes (i.e., impact on the supply chain of new products/markets, changing manufacturing footprint). In parallel, these tools help to measure potential future emissions reductions from suppliers who have set or will set their own Scope 1 and 2 reduction targets. Finally, by incorporating insights on decarbonization trends in certain commodity sectors over the next few years (e.g., the steel and concrete industries), these tools provide useful insights into reducing upstream emissions from the raw materials used by a company’s suppliers.

The main purposes of these digital tools are to:

  • Establish a feasible growth expectation for the business
  • Qualify the impact on Scope 3 emissions
  • Assess what overall reductions need to be realized to hit a predefined target (such as an SBTI target)
  • Identify what quantum of reductions will come from existing supplier initiatives and targets
  • Determine any ‘natural reductions’ from certain raw material and commodity sectors
  • Identify the gap needing to be bridged and areas of focus to hit the target

With the enhanced analysis from the first activity (measure), a company will also be able to target where along its supply chain it needs to focus — whether that’s a certain product or service, a group of suppliers, or a particular commodity like plastics. Most importantly, a company needs to identify which suppliers to engage with to plug the gap to its chosen target. However, the key to implementing this ‘decarbonization roadmap’ lies in the third step.

Maximize the Impact

Engagement with suppliers should, generally, start softly and focus on understanding where they are in their decarbonization journey. Establish who within their business is responsible for energy and carbon, whether they currently measure energy and carbon (and if not, why not) and what targets the supplier has (or will) set. The key is to obtain buy-in from suppliers, to signal that decarbonization is important to you and your customers, to make clear that it will be integral to how your company operates in the future, and that they are expected to play their part.

The initial engagement with the supplier is also about enhancing the resolution and granularity of the data the supplier provides. This is important, as a company will need to use more granular, unit-based emissions data (i.e., the amount of carbon emitted per product or service supplied) to fold in the reduction from the supplier’s decarbonization activities.

Without unit-based supplier calculations, and by continuing to use the spend-based approach instead, changes in company spending on certain suppliers (for example, purchasing a more expensive but lower-carbon version of a product) or simple changes in currency exchange rates will increase rather than reduce emissions, even though the supplier may have implemented energy or carbon reduction projects.

Moving suppliers to unit-based accounting is therefore fundamental to integrating these reductions into a company’s Scope 3 performance. However, it should go hand in hand with identifying and supporting those supplier reductions.

This process of measurement, strategy, and engagement forms a loop that starts from identifying impactful suppliers, building a global supplier engagement strategy that prioritizes suppliers and creating a comprehensive engagement program that improves measurement and ultimately drives supplier reductions that can be measured by the company.

Obtaining Credible, Verifiable Data from a Dedicated Digital Supply Chain Platform

One way to ensure better supplier data quality throughout the process is to use a dedicated digital supply chain platform to help engage first-tier suppliers and extended supply chains in a scalable, automated, and standardized way. Getting regular, real-time data from suppliers (i.e., Scope 1 and Scope 2, full value chain, or emissions from a product or service provided) can be done with outsourced and automated software solutions, rather than regularly running extensive data sweeps of internal systems.

Data science and artificial intelligence (AI) have become increasingly common ways to accelerate data collection, customize dialogue with multiple suppliers, and onboard new suppliers or categories of suppliers easily and quickly. They facilitate the industrialization of data collection to obtain actual emissions data rather than estimates.

Machine learning enables rapid data acquisition from various sources of existing data, whether those are internal sources like an enterprise resource planning (ERP) database or supplier invoices, external sources like supplier websites and CSR reports, or other databases (EcoInvent, SBTi, etc.). Combined with a conversational chatbot like ChatGPT, AI also enables customized, direct dialogue with suppliers to follow up on missing or uncertain data. The AI revolution is definitely introducing a disruption in the way we are addressing Scope 3.

Finally, validating Scope 3 emissions data is challenging but increasingly expected. To ensure the data is indeed credible, companies can ask suppliers if their emissions reporting has been assured, or they can use a data validation service to have responses reviewed for accuracy and corrected where needed. Using a data platform helps ensure the accuracy of supplier data and prepares it to be validated and verified against recognized global standards. Establishing a credible baseline by verifying your suppliers’ current emissions creates a foundation for measuring improvement over time.

Building a Net Zero Supply Chain

Encouraging one’s suppliers to reduce their emissions at a pace and scale reflecting identified targets should be done through a long-term engagement plan. The first step is to focus on enhancing the granularity of data, after which one should develop collaboration and guidance opportunities. Next, set minimum standards around data and reduction targets, and finally, make sure reductions happen. While the process starts by signaling that Scope 3 decarbonization is important to your company, and you want suppliers to align with your objectives, it should also enable them to do so, ultimately driving, incentivizing, and enforcing Scope 3 reductions.

A strategic, long-term approach to addressing supply chain emissions includes three interrelated components:

  1. Measuring the carbon footprint and actioning the ‘easy wins’ with key suppliers
  2. Setting ambitious yet achievable targets via tools to quantify business growth and emissions reduction hotspots
  3. Engaging internal teams and suppliers directly to improve the granularity of the data, and drive action

Obtaining high-quality, credible, and verifiable supplier emissions data is key. Having better data to guide action, foster alignment across stakeholders, and maintain momentum helps propel a supply-chain decarbonization roadmap. Increased collaboration between corporates and suppliers to obtain better data through, for example, SupplyShift’s supply chain platform or the WBCSD’s Partnership for Carbon Transparency initiative, highlights the collective commitment to reduce supply chain emissions and drive change.

The need for a data-based collective approach makes clear that Scope 3 decarbonization isn’t only about hitting one’s own net-zero targets and ambitions. It is also about helping partner companies navigate future climate transition risks, such as increasing costs from energy and carbon prices and helping them report on their progress. Fostering a sustainable and resilient supply chain cannot be done alone.

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