For most companies setting net-zero targets, the chief procurement officer may be the most important person in the room. On average, emissions in the supply chain – attributed to goods and services bought by companies – are 11.4 times greater than operational emissions, according to data from CDP, the London-based non-profit that collects environmental data on behalf of hundreds of investors.
Investors and other stakeholders expect companies to include these emissions in their net-zero targets, and to play an active role in reducing them. “Companies that want to align with 1.5°C can’t only deal with a tiny proportion of their emissions profile,” says Sonya Bhonsle, global head of value chains at CDP.
Progress to manage emissions in the supply chain is proving slow, however. Today, CDP releases the latest report from its supply chain programme. That involves around 200 major companies, with a combined annual procurement spend of $5.5trn, requesting information from nearly 27,000 suppliers on risks and opportunities related to environmental issues, including climate, forests and water security.
Around 11,400 suppliers responded. Of these, only 44% had climate targets and only 1 in 40 of these are approved, science-based targets aligned with efforts to stay below 1.5°C of global warming. In addition, few suppliers are looking to ‘cascade’ this effort up their own supply chains: only 38% of respondents are engaging with their own suppliers on climate change.
“Our data shows that corporate environmental ambition is still far from being ambitious enough,” Bhonsle says. “Companies have the blinkers on when it comes to assessing their indirect emissions and engaging with their suppliers to reduce them.”
There are good business reasons for addressing supply chain emissions beyond tackling carbon emissions. They can be a source of potential cost for buyers. According to last year’s supply chain report from CDP, around $1.26trn of revenue is at risk over the next five years due to impacts from climate change, deforestation and water insecurity. The 8,000 suppliers who responded to that survey estimated this would involve them passing on increased costs of $120bn to their customers.
However, assigning responsibility for emissions along value chains poses thorny issues of calculation – not to mention agency issues, of companies attempting to reduce emissions over which they have no direct control.
An organisation’s emissions are usually categorised as falling within three scopes, as per the Greenhouse Gas (GHG) Protocol, a global standard developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development. Scope 1 covers direct emissions, such as from industrial processes, or from company-owned vehicles. Scope 2 emissions are those resulting from purchased electricity or heat. Scope 3 emissions are those resulting from purchased goods or services – those in the supply chain – or from the use and disposal of the products produced by a company.
Setting the scope
Companies seeking to make a credible commitment towards tackling climate change, cannot avoid addressing supply chain emissions. Guidance from the Science Based Targets initiative (SBTi) – widely considered to set the gold standard for corporate emissions goals – is clear. If a company’s scope 3 emissions account for more than 40% of its total scope 1, 2 and 3 emissions, it should set a scope 3 target.
The GHG Protocol identifies eight categories of upstream emissions: purchased goods and services; capital goods; fuel and energy-related activities not included in scopes 1 and 2; transportation and distribution; waste generated in operations; business travel; employee commuting; and upstream leased assets. Current SBTi guidance allows for a range of targets to be set. These could be targets to reduce absolute volumes of emissions, emissions intensity, or targets for engagement with suppliers to encourage them to set their own science-based targets.
Miranda Hadfield, a principal at Boston Consulting Group (BCG) in London, identifies a number of reasons why progress on addressing supply chain emissions has been slow. One is cost. “It can be very costly for producers of raw input materials – like chemicals manufacturers or steel producers – to decarbonise. They need clear buying commitments from their customers to help share the cost of decarbonisation, and many will only move when decarbonisation standards become mandatory.”
However, some big buyers are beginning to demand action from their supply chains. Tech company Salesforce, for example, last year added a “sustainability exhibit” to all its supplier procurement contracts, which, among other things, requires them to supply products on a “carbon neutral basis” and set a science-based emissions reduction target. It also provides for the supplier to buy carbon offsets if it fails to address “climate deficiencies” identified in the contract.
Collaborate to cut
Others are collaborating with their suppliers to address some of their major sources of emissions. A number of European carmakers have committed to buying zero-carbon green steel from producers, giving the latter the confidence to invest in new, renewable hydrogen-fuelled production facilities. Some, such as Volvo, are co-investing with their suppliers to that end.
Other barriers include a lack of awareness among suppliers of the options available to decarbonise, or a lack of technical or financial capacity to invest. “[Buying] companies need to think about the interventions they can make with their suppliers” to help drive those reductions, says Cynthia Cummis, director of private sector climate mitigation at the WRI. “For example, some are working with suppliers to support them in investing in energy efficiency, or in getting access to finance for energy efficiency.”
Swedish furniture retailer Ikea announced last year a scheme to support nearly 1,600 direct suppliers in switching to renewable energy. The programme, initially launched in Poland, China and India, will involve Ikea negotiating power purchase agreements on its suppliers’ behalf, as well as offering subsidised financing for on-site renewables generation.
Adding it up
For many buying companies, however, the challenges with supply chain emissions are more profound: they are struggling to understand the scale of the problem. Take capital goods, and the example of a mining company buying a piece of equipment: the scope 3 emissions involved include those generated by the manufacturer of the equipment, from the manufacturer’s component suppliers, from their suppliers, such as steel or copper producers, and from those mining companies that supplied them with iron or copper ores.
“A big problem is transparency up multiple tiers of the supply chain,” says Cummis at the WRI. She notes that in food processing, for example, the farm represents the largest emission sources, “and it is often four tiers up the supply chain”. In addition, she adds, many purchasers are buying commodities, “so they don’t even know where their product is coming from”.
There are ways to short-cut these calculations. “There are lots of ways to model scope 3 data,” says Bhonsle. “What I always say to companies is, don’t let perfection be the enemy of the good.” The easiest and quickest way to reach a rough approximation of supply chain emissions is using an input-output methodology, she says. This might involve taking the average emissions intensity of a sector by revenue, which is then multiplied by the amount of spend with a supplier in that sector. “What we have seen is leading companies starting to move beyond that and start engaging with their suppliers to get their suppliers’ own data,” she adds.
Such an approach can quickly yield results in identifying leading practice – and where more engagement is needed. “If you are able to get to product-level ingredients, and vary the emissions factor by source location, that can make a huge difference," says Hadfield at BCG. "We have seen differences of 30–40% in clients' emissions baselines [that have conducted that analysis]."
Ask the question
So, for companies beginning to think about managing their supply chain emissions, where should they start? “Get started by asking your suppliers the question,” says Bhonsle. She recounts the example of a major fast-moving consumer goods company that recently began asking its suppliers for data on their GHG emissions, only for a surprisingly large number to reply that the request didn’t apply to them, as they didn’t have any greenhouses.
“That is funny and terrifying at the same time, but it shows that it is going take several years to get some suppliers from ‘we don’t own any greenhouses’ to setting science-based targets,” Bhosle says.
For some supply chains, collaboration will be key. Hadfield suggests that public announcements at sector-level can start to move the market. "If US grocery retailers came out en masse to say that they intended to radically decarbonise all their refrigeration systems over the next ten years, and called for solutions providers to make offers at scale, you would have suppliers bidding to provide that technology more cheaply,” she says. However, she notes that coordinated action at sector level needs to be mindful of issues around competition law.
The good news is that, while costs may be concentrated in parts of certain supply chains, the overall cost of decarbonisation to the end consumer may not be great. According to research from the World Economic Forum and BCG published last year, full decarbonisation would result in end price increases of only 1–4% in the medium term or, as it notes, less than $1 on a $40 pair of jeans.
Engaging with supply chains on carbon emissions is not only about increasing costs. It can provide opportunities to find efficiencies as well as cement important commercial relationships, says Bhonsle at CDP. Its latest report found suppliers reporting some $29bn in savings as they reduced emissions by 1.8 billion tonnes of CO2 – equivalent to the annual emissions of 454 coal plants.
“What companies are understanding is that by marrying their climate campaigns and targets to the way they work with their suppliers, they are reducing the risks they will face in the future – they will hopefully have lower costs and better reputations,” she says. “That is why we are seeing so many more scope 3 targets.”