Overcoming the barriers to decarbonizing supply chains and achieving accurate data
Navigating evolving climate, sustainability, and ESG legislation and their respective requirements for reporting and compliance can seem like a labyrinth. New frameworks, covering a multitude of organizations in multiple jurisdictions – many interlinked and interrelated – seem to be arising all the time. As urgency to meet the Paris Agreement goals and EU Green Deal increases, so too does the sophistication of regulations and scrutiny on reporting.
Much of the pressure in the EU stems from three key frameworks: the EU Corporate Sustainability Reporting Directive (CSRD) and its subsequent enforcement guideline, the European Sustainability Reporting Standard (ESRS); the EU Carbon Border Adjustment Mechanism (CBAM); and the Corporate Sustainability Due Diligence Directive (CSDDD).
Coming down the line is the EU deforestation regulation which, from the end of 2024, will obligate businesses to analyze and report on any links to deforestation up their supply chains. On the horizon in the UK is also another CBAM, further details of which were recently announced. While reporting requirements vary between each framework, what these policies have in common is the need for accurate, consistent Scope 3 emissions data.
The complexity of Scope 3
While Scope 1 and 2 emissions are relatively straightforward to calculate and control, in theory, Scope 3 data is intricate and complex. Typically, it also accounts for the lion’s share of an organization’s greenhouse gas (GHG) footprint, on average coming in at 26 times higher than emissions from direct operations and relates to the entire supply chain all the way to the end consumer.
As a result, many businesses currently rely on broad estimates to report their carbon footprint. However, estimates are still estimates, and they do not provide accurate Scope 3 calculations. Without being armed with such data, businesses cannot calculate the true size of their GHG footprint or the rate at which they are decarbonizing. To be in line with the Paris Agreement, an average global reduction of supply chain emissions of between two-to-five percent is needed today. Realistically, it’s difficult to determine whether we are hitting that target given the lack of supply chain data available.
A move towards incorporating more primary data direct from suppliers and less secondary data from third parties, such as industry bodies, is needed. This will increase transparency of suppliers’ sustainability actions, helping businesses identify hotspots and those in the chain posing a risk to compliance. Stringent practices for measuring Scope 3 emissions are therefore becoming a pressing priority, to strengthen businesses’ resilience to regulatory change and protect their reputation.
Barriers to decarbonization
Drilling down to product-level emissions has its challenges, particularly for those with complex supply chains.
While incorporating primary data is a crucial step to improving the accuracy of reporting, each supplier will also be on its own journey to Net Zero, with varying levels of maturity in their collection of emissions data.
Further fragmenting the landscape, suppliers will be adopting disparate methods for calculating emissions, with differing standards, allocation methods, and emission factors applied. This leaves businesses struggling to manage large volumes of data while questioning its accuracy and reliability.
Actionable steps to strengthen reporting methods
There are practical steps that can be taken, however, to overcome these hurdles and increase the transparency of supply chain emissions.
Firstly, work with, not against competitors to form coalitions and accelerate progress. Harnessing cross-industry and sector collaboration to streamline practices will reduce discrepancies and alleviate some of the reporting pressures on suppliers. Partnership for Carbon Transparency (Pact) for example provides a unified process for carbon data reporting while examples of sector specific processes include Catena X in the automotive industry, or the Pharmaceutical Supply Chain Initiative.
Complex value chains can include thousands of suppliers, so when looking at where to start, prioritize high-impact suppliers, in terms of emissions, within your value chain.
Nurturing a collaborative relationship across the supply chains is no mean feat, but working closely with suppliers can put businesses on the path towards accurate Scope 3 data. Consider creating an engagement program that’s mutually beneficial for suppliers and your company. Dividing the supply chain into four categories based on the maturity of the emissions data suppliers are collecting will allow you to tailor communication based on suppliers’ capabilities, empowering them with the know-how to reduce their own emissions.
Low maturity suppliers will be those that have not previously calculated their carbon emissions. Sharing educational resources, best practice, and training to upskill the supplier will be beneficial here.
Suppliers in the medium maturity group will range from those partially reporting on Scope 1 and 2 data through to those with verified data across all three scopes. These will depend on a degree of additional support to achieve the required standards of carbon accounting. Best in class suppliers will be working with their own supply chains and will benefit from support to run their engagement programs. Given the size of global supply chains, this will also support the scaling of reporting that is needed.
Environmental impact, not just compliance
The regulatory landscape is maturing, placing greater emphasis on transparency across borders, best-in-class sustainability practices and more accurate data. Businesses must collaborate with competitors and partners in their value chain to develop stringent practices for measuring Scope 3 emissions data. Until we do this, we cannot determine the reality of a supply chain’s GHG footprint or effectively develop actionable insights to decarbonize.
Organizations are under the watchful eyes of regulators, investors and customers as sustainability becomes ever more important and increasingly, a differentiator for where consumers choose to spend their money or where potential shareholders choose to invest their capital. However, the goal everyone should be pushing towards is not simply complying with the latest legislation but driving transformative change to reduce environmental impact.
For a list of the sources used in this article, please contact the editor.
Mauro Cozzi is the CEO and Co-founder of Emitwise. Emitwise’s innovative carbon management platform accurately measures, tracks and reports emissions to help procurement professionals with complex supply chains to make informed decisions that reduce Scope 3 emissions.