A recent UN report revealed that governments have only pledged emissions reductions sufficient to cover a third of that required to keep global temperature rise below the ‘safe’ limit of 2°C. Clearly, further action from the private sector will be required to help bridge this gap.  Whilst the sustainability industry has witnessed a steady increase in organisations disclosing their greenhouse gas (GHG) emissions; we are also seeing increasing momentum for target setting to reduce these.  That said, targets are typically being set across the direct emissions from sources owned or controlled by the organisation – Scope 1 or indirect emissions from purchased electricity/ steam/cooling – Scope 2, but when it comes to addressing the emissions embedded in the whole value chain – Scope 3, most fall short. For example, one study estimated that companies that calculated and disclosed their Scope 3 emissions only captured 22% in their reporting, emphasising the need for improvement in understanding and disclosure across the different ‘Scope 3’, indirect emissions categories.

It is estimated that around three-quarters of the GHG emissions associated with many industry sectors come from their supply chains, which means that companies focusing just on reducing their Scope 1 and 2 emissions are overlooking a significant proportion of their overall global environmental impact and influence. Moreover, the importance of reporting on Scope 3 emissions is increasing, as highlighted by frameworks such as the Science Based Target Initiative. This scheme mandates applicant companies to screen their Scope 3 emissions and set reduction targets if more than 40% of the total carbon footprint lies in the value chain.

There are numerous benefits to understanding your supply chain impacts beyond the significant environmental positives. These include mitigation of regulatory and reputational risk, and identification of opportunities to reduce the cost of purchased goods and services through supply chain optimisation.

Why is capturing Scope 3 data challenging?

There are a number of barriers that make capturing and evaluating data on supply chain challenging.  Typical issues that businesses come up against include:

1. Targeting the greatest environmental impacts in your supply chain requires knowledge of where greenhouse gas hotspots are. Understanding which elements of supply chain (transport and logistics, product manufacture, purchase of intangible services) are the most carbon intense requires expert knowledge, which organisations may not have in house.

2. Primary data on supply chain impacts may be poor and many companies lack internal resource to identify, engage and source the data. In absence of actual data from suppliers, organisations may need to design ways to reasonably calculate and estimate their impact.

3. Resistance may be experienced by suppliers, concerned about disclosing the data requested, either because it is not readily available, or due to confidentiality or due diligence concerns.

What can we do about it?

The good news is there are a number resources and expertise available which companies can draw upon to move their supply chain environmental management ambitions forward:

• Start by targeting the aspects of your scope 3 emissions profile that is material, for instance, your top suppliers by spend or suppliers of your largest raw material. This will help determine which of the 15 categories scope 3 categories (as defined by the Scope 3 GHG protocol) are the first ones to look at. Remember the information in your Scope 3 disclosures should be pertinent to your stakeholders, cover what they want to hear about, and be highly material to your organisation.  Your disclosures and assessment should speak to stakeholders both internal and external to your organisation.
• Investigate how your competitors and other companies from your industry manage their scope 3 emissions by using public information such as their sustainability statement, annual report and accounts and their submissions to CDP, if available. Should your organisation be covering the same topics to keep up?
• Start planning the data collection process as soon as your previous years’ reporting is over, as it can take a whole year to get good quality data. Include in your plans the steps to take if suppliers don’t provide the data – these can range from using industry averages, benchmarks or proxy data to estimate your Scope 3 emissions.
• Prioritise data coverage over quality in the first year of reporting. This will allow your organisation to get a better appreciation of your organisation’ impacts and start informing stakeholders. We would advocate gaining a wide understanding of each environmental area category as compared to seeking the highest quality information across the board.
• Embed your data requirements into your future third party contracts and service level agreements – this is commonplace for travel and waste data; but those at the forefront are now requesting such data within wider services; and may be engaging third parties through supply chain information software providers or harvesting information through other platforms such as the CDP. Closing the Scope 3 reporting gap is the big next step for organisations to increase the rigour of their carbon footprint and meet stakeholders’ expectations for climate action.

In the face of increasing warnings from the international scientific community on the dangers of postponing the decarbonisation of the economy, companies should take ‘early’ action and continue the pathway of improvement, which will involve seizing opportunities for emissions reduction across the value chain.

Even though the process of managing Scope 3 emissions successfully is challenging, the organisations concerned with reducing these emissions will gain a competitive advantage by responding to the mounting stakeholder pressures to mitigate the wider impacts of business operation. Therefore, closing the Scope 3 reporting gap is the big next step for organisations to increase the rigour of their carbon footprint and meet stakeholders’ expectations for climate action.

Carbon Smart has been helping large and medium-sized companies over the past 10 years to plan, collect and manage environmental data across the value chain to optimise reporting and achieve emission savings. Read some of our success stories here and get in touch if you have questions or need any advice to support you in this journey.