Sustainability: Why companies must take full responsibility for their supply chain

Green transition 2 March 2020 Thomas Kræmer Schmidt

As more companies state bold ambitions to become carbon neutral, it is a blessing in disguise. Too few take end-to-end responsibility for their supply chain, and as a result, they oversee the need for profound, sustainable change.

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An increase in public awareness of global warming is pushing companies to take action towards the development of a more sustainable world.

We have seen a fourfold increase in climate commitments from Fortune Global 500 companies over the last four years and the analysis from climate solution specialist, Natural Capital Partners, states that if this trend continues by 2030, 79% of Fortune Global 500 companies will be either carbon neutral, using 100% renewable power or have met a science-based target for internal emissions reductions.

So far, so good. However, even if these numbers might look great, they also cloud the appearance of companies’ climate efforts and disguise what in reality is too unambitious targets.

A hallmark of climate leadership?

When a company sets targets to become carbon neutral, it signals a promise of strong action towards decreasing global emissions and is seen by many as the hallmark of climate leadership. Consequently, it has almost become a benchmark that companies must reach the ‘climate neutral’ title at all costs. But in reality, the actions behind are less impressive.

Reaching carbon neutrality signals that the company has balanced out all the carbon emissions caused by them through either carbon removal or by eliminating carbon emissions altogether. All too often though, it only covers those emissions from their directly owned operations or from the indirect emissions from their purchased energy. This is known as scope 1 and 2, as defined in the Greenhouse Gas (GHG) Protocol.

Getting to scope 3

In many sectors, most of a company’s GHG emissions are not included in the scope 1 and 2 accounting-based carbon neutrality ambition, since the majority stems from all other activities that a business engages in throughout its supply chain. These often non-stated emissions are known as scope 3 emissions and are on average 5.5 times the size of a company's combined scope 1 and 2 emissions, according to CDP Global Supply Chain Report 2019.

Scope 3 covers emissions from e.g. the manufacturing of raw materials, leasing of buildings or transporting products from one place to another. In some sectors like retail, these scope 3 emissions dominate completely.

Emmission chart

The ratio of supply chain to direct emissions differs from industry to industry. Source: CDP – Supply chain report 2019.

Data difficulties

For many companies, it can be difficult to collect data on emissions throughout their supply chain, and this makes some use the distinction of scopes as an excuse for not taking responsibility for other indirect emissions.

But setting ambitions for your scope 3 emissions reductions, and including suppliers in the process, can help push the suppliers to take actions for their own operations as well as cascading the effect further up in the supply chain to their suppliers.

Only a few work with science-based targets

Turning to CDP for the harsh realities, the UK-based NGO investigated 125 leading (purchasing) companies’ suppliers with a combined total sum of 7,269 Mt CO2e of scope 1 and 2 emissions, which corresponds to an amount greater than the annual greenhouse gas emissions of USA and Canada together.

The CDP study found that only 2.7% of the suppliers had moved from conversation to action and gotten approved science-based targets (SBT), which requires companies to set targets for their scope 3 emissions if they represent more than 40% of total emissions.

The offsetting illusion

Moreover, it is often easier and cheaper for companies to reach carbon neutrality by investing in carbon offsetting, but it risks giving the dangerous illusion of a “fix” that will allow emissions to just continue to grow.

Learn more about the offsetting illusion

If companies invest in offsetting at the expense of building a science-based net-zero strategy or proactively developing new products and services that are far less emission-intensive throughout the supply chain, it can leave them in a more precarious position in the future  financially, environmentally and reputationally.

Prepare for a net-zero economy

According to the Task Force on Climate-related Financial Disclosures, it is crucial for companies to proactively evaluate and manage climate-related transition risks related to regulation, market, technology and reputation. This to prepare their business model to be viable in a net-zero economy.

We already see a drive for low-carbon solutions and companies should prepare for a carbon-constrained world instead, by taking responsibility for scope 3 emissions, rethinking their supply chain, business model and investing in greener technologies.

How to move forward

Based on our experiences in the field, we advise the following to get started with moving your supply chain carbon management ambitions forward:

  • Start with conducting a scope 3 emissions screening to gain a robust understanding of the GHG emissions in your supply chain and identify any hotspots, enabling you to determine which of the 15 scope 3 categories (defined by GHG protocol) are the first ones to look at. 

  • Quantify your scope 3 emissions to create a GHG inventory baseline, and then formulate ambition through quantitative reduction targets. Prioritise data coverage over data quality in the beginning, as this will allow your organisation to gain a wider understanding of each category and inform stakeholders.

  • Identify the suppliers that contribute the most to your upstream scope 3 emissions and formulate a supplier chain engagement strategy building on either enforcement, support/informative or inducing competition among suppliers.

  • Communicate with your suppliers to inform them of your ambitions and collaborate on achieving emissions reductions and unlock new business opportunities and innovations.

How can we help?

Want to get started with scope 3? Reach out to the author to begin the conversation or learn more on our Sustainability Consulting services:

Learn how we help clients through Sustainability Consulting.

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