All eyes are on Chief Procurement Officers (CPOs) as organizations look for ways to address Scope 3 emissions, the indirect result of a company’s value chain. The added pressure comes as environmental, social, and governance (ESG) issues climb to the top of the agenda. According to Deloitte’s 2023 CPO Survey, addressing ESG needs has become the second-most important objective for CPOs, with improving operational efficiency remaining in the top spot.
As the conversation around climate and Scope 3 emissions intensifies, procurement leaders should build a greater understanding of the complex factors in play – and how they can help their organizations more effectively achieve ESG goals.
Why Scope 3 emissions matter
Scope 3 emissions are often responsible for the largest proportion of a company’s carbon footprint. Under this scope, Category 1, Purchased Goods and Services, represents the largest emissions category for most industries. And it is the most complex, as it entails engaging with the supplier base. That means procurement has a unique role to play, influencing one of the largest contributors of emissions.
The emissions portion of Category 1 ranges between 35 percent and 40 percent, depending on the industry, according to the CDP. This category alone can move the needle on sustainability efforts, but it requires a deliberate approach that accounts for multiple factors, including access to accurate data, supplier engagement, and supply chain transparency.
A five-stage approach to help reduce emissions
Many companies have set net-zero targets using the Science Based Targets initiative (SBTi), which requires the inclusion of Scope 3 emissions, but they may find it challenging to move forward. Based on Deloitte’s experience working with multiple companies to address emissions, combined with insights from CPOs and academic studies, we have developed a path for a five-stage journey. This approach seeks to drive efficiency while accelerating impact for procurement leaders.
1. Assess baseline opportunity
Understanding your company’s emissions baseline starts with identifying the data you have, which will help influence the greenhouse gas (GHG) protocol analysis method you use to measure emissions.
The GHG protocol provides multiple options for analysis methods. The spend-based method, which calculates the value of goods and services, is the least accurate. Supplier-specific, which calculates based on product-level emissions data of goods and services, is the most accurate. A hybrid model, meanwhile, can strike a balance between ease of implementation and accuracy.
Shifting to a more accurate method can bring incremental value to your company. It allows you to create supplier segments or groups that inform a high-level engagement approach, such as a focus on the supplier-wide base, specific segments, or even specific suppliers.
2. Align goals, strategies, and investments
Many companies have announced their emission-reduction goals and aligned their goals with the SBTi. Next, they need to identify a strategy to achieve them – including how to galvanize suppliers to act. Some companies choose to collaborate with suppliers, while others delegate responsibility for achieving emissions reductions.
Often there is no one-size-fits-all approach. A hybrid approach may work better, with suppliers mapped based on their business impact and other criteria. You can then develop specific strategies for each quadrant of a matrix, such as Deloitte’s supplier collaboration matrix below.
3. Evaluate initiatives and develop a roadmap
A clear roadmap can help you navigate the evolving complexity of regulations, stakeholder expectations, and supply chain disruption. As part of that roadmap, identify the best carbon abatement strategy to partner on with your suppliers – selecting parameters that are most important to your goals and using a methodology that prioritizes initiatives and helps move the needle faster. Change management will be key, enabling a smoother mindset shift for internal resources and external stakeholders, including suppliers.
4. Execute strategy
When it comes to executing strategies and initiatives, think in terms of one-time actions as well as continual activities. One-time actions may cover key communications, alignment, and engagement with suppliers, as well as updating terms and conditions or going through a sustainable sourcing exercise. Continual activities depend on the strategy adopted and can include training suppliers, managing their access to funding, or administering penalties when a supplier does not meet agreed-upon goals.
5. Monitor and manage
Many companies hit the ‘pause’ button after measuring emissions, failing to progress meaningfully toward their emission-reduction goals. To help ensure suppliers meet new emission-reduction obligations, procurement’s role should evolve to include monitoring suppliers’ ESG metrics, as part of a performance management framework, and reassessing supplier engagement strategies as needed.
Taking the next steps
While transforming procurement’s approach to Scope 3 emissions and suppliers can be intimidating, realize that this is not a disruptive, one-time project. It’s a journey. And the need to start sooner rather than later is growing as climate change affects more companies directly and indirectly.
For additional insights that can help you get started, visit https://www2.deloitte.com/us/en/pages/consulting/articles/scope-3-sustainable-procurement.html
For a list of the sources used in this article, please contact the editor.
Spencer Young is a principal that leads Sustainable Procurement within Deloitte Consulting LL’s Supply Chain and Network Operations practice. Deloitte provides industry-leading audit, consulting, tax and advisory services to many of the world’s most admired brands, including nearly 90 percent of the Fortune 500® and over 8500 US-based private companies.