MHI Solutions Improving Supply Chain Performance
There’s widespread agreement that transitioning to a carbon-neutral economy by 2050 can’t be achieved unless companies get serious about reducing greenhouse gases generated throughout their value chain, yet the challenges of measuring Scope 3 emissions have left many enterprises struggling out of the gate. New tools and supplier engagement strategies promise to simplify this complex task.
When a group of chief sustainability officers from major consumer brands got together a few years ago, there was cause to celebrate: Goals they set to reduce their value-chain emissions had been approved by their bosses and the world’s leading arbiter of climate targets, the Science-Based Target initiative (SBTi).
But the CSOs were concerned about meeting the targets, which complied with SBTi’s new net-zero standard requiring a full accounting of Scope 3 greenhouse gas (GHG) emissions, defined as all indirect emissions from sources throughout a company’s value chain. What were they going to do next?
“There was a lot of handwringing and lack of clarity on how suppliers could be influenced to take climate action,” said Matt Banks, associate director for Guidehouse, the sustainability specialist that was advising the group. “They didn’t know (what to do next) and it was not in their job description.”
Indeed, Scope 3 has become a huge roadblock on the road to decarbonization, with 53% of companies surveyed by SBTi earlier this year identifying the difficulty of measuring value-chain emissions and developing plans to mitigate them as the biggest reason they haven’t set science-based climate targets.
A separate survey by MIT and the Council for Supply Chain Management Professionals (CSCMP) found nearly half of companies with net-zero goals said they didn’t plan to start measuring or reducing Scope 3 emissions for at least five years. Only 24% had Scope 3 emissions-reduction initiatives in place.
Those are troubling numbers because value-chain emissions account for 70% of all GHG emissions. The average company’s Scope 3 emissions are more than 11 times its Scope 1 and 2 emissions—direct emissions from operations and indirect emissions from purchased electricity, steam, heating and cooling.
The good news is that new tools, strategies and solutions are emerging to jumpstart companies’ Scope 3 efforts by helping them overcome commonly cited barriers, including confusion around measurement methods and standards, lack of access to accurate supplier data and insufficient C-suite leadership.
Help can’t come soon enough as pressure from regulators, investors, customers and other stakeholders continues to mount and create a new sense of urgency for companies that aren’t already working on plans to measure, report and reduce value-chain emissions:
- The European Union’s Corporate Sustainability Reporting Directive (CSRD) will ultimately require 50,000 companies worldwide, including many small and medium-sized enterprises (SMEs), to disclose their emissions, including Scope 3.
- California’s Climate Corporate Data Accountability Reporting Act (SB 253) will require companies with more than $1 billion in revenue that do business in the state to start reporting Scope 1 and 2 emissions in 2026 and Scope 3 emissions in 2027.
- The U.S. Securities and Exchange Commission held off on mandating Scope 3 reporting for the time being when it issued new climate reporting requirements in March, but the SEC is requiring certain publicly held companies to begin disclosing their Scope 1 and 2 emissions.
- Customers are asking suppliers to provide ever more granular data about their emissions and to align their mitigation plans with the customer’s net-zero goals. Suppliers that don’t comply risk losing business.
- Even as corporate environmental, social and governance (ESG) policies weather a backlash, Scope 3 “has become much more of a board-signaled priority” in the past few years, according to Julia Salant, general manager for carbon for business sustainability ratings provider EcoVadis.
Meanwhile, the clock is ticking down on the international agreement signed at the Paris climate change conference nine years ago to limit global warming to 1.5 degrees Celsius above pre-industrial levels—a goal that would require a 43% reduction in GHG emissions by 2030.
“We can’t really meet the Paris Agreement unless the supply chain reduces emissions,” Banks said. “It’s that important. The value chain has to cut their carbon footprint, otherwise we’re not going to be on track with the science and the international commitments.”
Meeting Suppliers Where They Are
Scope 3 includes 15 categories of emissions upstream and downstream from a company’s operations. For most companies, one of the most significant is “purchased goods and services,” making effective supplier collaboration a key to success in measuring and ultimately mitigating Scope 3 emissions.
Supplier engagement initiatives have undergone a “major shift” recently as procurement leaders realize that most suppliers in any given supply chain are “just getting started on their decarbonization journey,” said Salant, who manages EcoVadis’ new carbon solution, Carbon Action Manager.
“They don’t have dedicated teams and resources to conduct lifecycle analysis of every product they sell and report product-level data on a quarterly basis,” Salant said. “Procurement teams now recognize this is where their opportunity is to drive their suppliers forward on the journey in a repeatable manner.”
Mike Troupos, vice president of energy and sustainability manager for Foresight Management, agrees that the way large procurement organizations view supplier engagement on sustainability has changed significantly from a focus on their own needs to a meet-them-where-they-are approach.
“Big companies are used to kind of muscling their supply chain a little bit, but I think (Scope 3) is going to take a lot more finesse than muscle,” Troupos said, adding that effective collaboration has to be based on a message of, “Hey, we’ve set all these goals, how can you help us get there, we want to work with you.”
Relaunched this year as a standalone solution, the Carbon Action Manager allows more flexibility for companies to start or accelerate their EcoVadis journey and collaborate with suppliers on Scope-3 decarbonization, with the help of a carbon scorecard, e-learning, a carbon calculator and more. Nearly 60,000 suppliers that supply 300 brands now have carbon scorecards and are starting to report emissions to their customers through the platform.
Guidehouse’s Supplier Leadership on Climate Transition (Supplier LOCT) program, which grew out of Banks’ experience with frustrated CSOs, offers a tiered e-learning program designed to meet the needs of suppliers wherever they are on the “carbon maturity scale,” said associate director Jana Petrikova.
Suppliers invited by their supply chain customers to participate learn how to calculate Scope 1, 2 and 3 emissions, set science-based targets, develop mitigation plans and report their emissions through major sustainability assessment platforms like EcoVadis and CDP. Features like a 24-hour help desk keep participants on track.
Supplier LOCT currently includes about two dozen large brands working with nearly 1,000 suppliers—many of them SMEs that haven’t started measuring Scope 1 or 2 emissions and don’t have the staff to move forward with Scope 3 analysis on their own or the budget to hire a consultant, Petrikova said.
Smaller companies trying to piece together the Scope 3 puzzle on their own can find themselves gulping from a firehose of information from sustainability consultants and carbon accounting software vendors anxious to help and eager to cash in on what has quickly mushroomed into a Scope 3 cottage industry.
“There’s a lot available online but it’s very difficult to sift through it—what should we be doing, what software should we be using—so this program really guides them step-by-step on what they need to do,” Petrikova said. “There are homework assignments, and we provide all the resources they need to use.”
MHI is partnering with Guidehouse to offer Supplier LOCT training for its members at a deep discount. MHI member Southworth International Group Inc. (SIGI), which completed the Scope 1 and 2 courses last year and is now in Scope 3, is sold on the program, said Kari Rasheed, senior manager of global trade compliance and sustainability.
“What I really like about Supplier LOCT is how much it simplifies the process for you,” Rasheed said. “The program breaks down something that feels completely overwhelming into bite-size, manageable pieces with very clear and concise instruction and supporting documentation.”
Programs like Carbon Action Manager and Supplier LOCT enable brands to “cascade their ambitions,” in Salant’s words, by bringing suppliers along on their decarbonization journey. In turn, suppliers become equipped to work with value-chain partners to measure and reduce their own Scope 3 emissions.
Guidehouse has seen the cascade effect. Atlantic Packaging participated in Supplier LOCT as a supplier and later became a brand sponsor to some 50 of its own supply-chain partners. Said Banks: “The CEO went through the program personally and liked it so much he wanted to bring his suppliers through it.”
Simplifying the Data Challenge
Lack of clarity around what to measure and how to measure it, combined with challenges in making data actionable in procurement decisions, has left companies spinning their wheels at the starting line of their Scope 3 journey. Experts offer simple words of wisdom: Don’t let the perfect be the enemy of the good.
The holy grail of Scope 3 analysis is the primary data only a supplier can provide to its customer based on its estimate of emissions from its own operations. Since most suppliers haven’t completed their Scope 1 and 2 analysis, spend-based analysis is the best option for companies starting Scope 3 measurement.
“Start with the data you have,” Sangwon Suh, head of science for carbon accounting software provider Watershed, advised attendees in a recent webinar on Scope 3 data. Spend analysis combined with high-quality emissions factor data is a “reasonable proxy” for measuring emissions, is easily attainable and auditable and conforms to the GHG Protocol as well.
According to an SBTi survey, 43% of companies currently reporting Scope 3 emissions use spend analysis, applying emission factors to calculate carbon content per dollar of spend on procured items. Only 6% of the companies use supplier-specific data, but a growing number take a hybrid approach that uses both.
Though not as accurate as supplier-specific data, spend analysis is useful for further simplifying Scope 3 analysis by narrowing the list of emissions categories a company measures from all 15 identified by the GHG Protocol down to the three or four “hotspots” that contribute the majority of its Scope 3 emissions.
Suh cautions that not all solutions are created equal and recommends that companies considering investing in carbon accounting software research how frequently databases are updated and whether they reflect geographic variations in the carbon intensity of power generation from region to region.
An aluminum smelting operation powered by a coal-fired plant will be much more emissive than one located where low-carbon energy from renewable sources is available, Suh said. Watershed’s CEDA database, developed by Suh over the past 20 years, provides granular detail on 148 regions worldwide.
SIGI learned the importance of visibility into such variations when it calculated its Scope 1 and 2 emissions. The company’s U.S. plant accounted for half of SIGI’s total power usage but 78% of emissions, while its Swedish plant accounted for 20-30% of power but only 1% of total emissions due to the high percentage of renewables in Sweden’s energy mix, Rasheed said.
The biggest drawback to relying on spend-based analysis using industry average emission factors is that it can’t provide the data needed to drive meaningful collaboration with suppliers, said Alex Scott, creator of the Fleet Sustainability Index (FSI) and founder of startup Sustainable Logistics.
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