Scope 3 Value Chain Emissions Reduction

Supply chains represent the full range of inputs, steps, and activities necessary to create and deliver products and services to customers. When a company measures its carbon or greenhouse gas (GHG) emissions for regulatory or voluntary ESG reporting, supply chain emissions often represent the majority of its total environmental footprint. In carbon accounting terms, supply chain emissions are often referred to as Scope 3 emissions.

A Short Overview of Scope 3 Emissions

If you're familiar with financial accounting, which adds up income and expenses into a budget, carbon accounting works in a similar way. An organization or supply chain's GHG emissions are its carbon inventory, which can be reduced or netted against carbon improvements, emissions reduction, or offsets.

Common practice in carbon accounting is categorizing CO₂ as Scope 1, Scope 2, or Scope 3 GHG.

Scope 1  +  Scope 2  +  Scope 3  =  Total Emissions

Emission "scopes" are used by Greenhouse Gas Protocol, one of the gold standard frameworks for carbon accounting, as well as by the U.S. Environmental Protection Agency (EPA).

Scope 3 Emissions in Supply Chains

Scope 3 emissions are all of a company's "indirect" or supply chain emissions. Examples include all the pollution from transporting and shipping materials and products across the different steps of a company's supply chain.

For many companies - particularly companies with a physical product and global supply chain - Scope 3 emissions represent 60-90% or more of the organization's carbon footprint. Scope 3 is also the most difficult category to accurately and fully measure.

In carbon accounting, there are multiple different categories for Scope 3 supply chain emissions. Some of the most common are:

Calculating emissions in some of these areas may require complex modeling, inputs, and assumptions - and can be challenging to calculate. Others often take direct supplier engagement to gather data on your partner's operations and emissions. Depending on your supply chain, not all 15 Scope 3 categories will be relevant to your company.

Why Supply Chain Carbon Accounting Matters

According to CDP, McKinsey, and our own internal data, a company’s supply chain greenhouse gas (GHG) emissions are, on average, 5 to 25 times higher than its direct emissions, making supply chain sustainability and Scope 3 carbon accounting critical priorities for organizations taking action to report emissions, decarbonize, reduce their environmental footprint, de-risk their brand, and improve ESG performance.

Source: McKinsey

As you likely already know, supply chain emissions management is complex, and carbon accounting across your suppliers requires a holistic view of their processes, logistics, and energy use involved in manufacturing and delivering your products, plus the ability to track, collect, and connect data at each step. It also involves use of procurement influence to shift suppliers in sustainable directions. By reducing partners’ Scope 1, 2 & 3 emissions, you reduce your company’s Scope 3 emissions.

Carbon Accounting for Supply Chain Scope 3 Emissions

Now that we understand Scope 3 emissions, let's walk through steps and ways you can perform carbon accounting calculations for your supply chain. The right Scope 3 measurement approach for you and your company will primarily depend on the makeup of your supply chain, your supplier relationships, what data you can collect from them, and the carbon accounting resources available to you.

The first supply chain carbon accounting method available is a spend-based carbon accounting estimate. Spend-based Scope 3 carbon accounting takes the financial value goods or services you purchase from suppliers and multiplies it by an emission factor – the amount of emissions produced per unit or monetary value of the goods – to calculate an estimate of your emissions.

To perform a spend-based emissions calculation you need three data sources: your purchases, your suppliers, and the corresponding emission factors. This data will typically come from your accounting team, who can export it from your company's accounting system. Options also exist to integrate your financial system or ERP to have data feed directly into Brightest.

The spend-based method works best if the most accurate supply chain data you have is financial purchasing order or similar procurement data. For example, say you don't have direct supplier data, but you do know your company spent $1 million dollars ordering goods and services from your Tier 1 suppliers in your reporting year. The spend-based method calculates the value or number of units you purchased, multiplied by an industry average emissions factor for that product.

Since spend-based emissions calculations use industry averages, a spend-based estimate will be less accurate. We might estimate the carbon footprint of a shirt, but we aren't accounting for environmental differences between a shirt made of cotton, silk, polyester, or recycled scrap fabrics.

A second calculation method is an average data carbon accounting estimate. This method is similar to the spend-based method, but instead of using financial data relies on material weight data. If our company's clothing is made of X tons of cotton, multiply the weight times the appropriate emissions factor for the material. Like the spend-based method, average data carbon accounting also suffers accuracy issues due to the use of averages.

The most accurate form of supply chain carbon accounting is the supplier-specific or primary source method. Supplier-specific carbon accounting collects product-level cradle-to-gate GHG data from each supplier using sustainability surveys and data collection workflows. Since supply chains typically represent most of a company's Scope 3 emissions (which in turn encompass the majority of the company's total emissions), direct data on purchased goods and services always provides the most accurate Scope 3 calculation.

Supplier-specific emissions data is a form of activity-based estimation. If we work with 10 suppliers, each one gets their electricity from a local power utility, and they document their monthly utility spend, we can convert that energy in kilowatt hours (kWh) or megawatt hours (MWh) to carbon. This same general process can be applied to water usage, transportation vehicles, shipping, and all the different activities and steps in your supply chain. Gather the activity data, identify the right emissions factor, and convert the activity to CO₂e.

Gathering this data can be very time-consuming, particularly in complex, global supply chains, and there may be gaps. Some suppliers may not know their emissions data in depth. And your suppliers have their own suppliers and subcontractors. A hybrid emissions calculation approach uses supplier-specific and activity-based data wherever possible, then fills in the gaps with industry averages. This hybrid approach can still be fairly precise, or at least much more so than a spend-based or average data-based emissions calculation.

Better Supply Chain Transparency and Traceability = Better Carbon Accounting Accuracy

As the old saying goes, you can't improve what you don't understand or have the ability to measure. If your company doesn't have a supplier and vendor database or tracking system, you need to work with IT and operations to set one up. Many traditional supply chain management systems, ERPs, and databases aren't designed for sustainability reporting or ESG metrics, so make sure you take that into account, or use a dedicated supply chain carbon accounting system like Brightest.

Supply Chain Carbon Accounting Should Consider Each Step in the Chain

If your organization's operating at scale, it's likely your supply chain's a lot more complex than a simple diagram. Apple, for example, works with nearly 1,000 Tier 1 suppliers around the world to manufacture iPhones and Macbooks. However, supply chain carbon accounting efforts benefit from focus and simplicity, so start by engaging your strategic, long-term Tier 1 suppliers and direct contract relationships. Meet with them about conducting a supplier sustainability survey to gather their emissions data. Try to understand what they do and don't measure. Educate them on why supply chain emissions matter to your business and theirs. Help educate and guide them if they don't know how to calculate their emissions.

Once you have visibility into your top Tier 1 suppliers, work your way toward better understanding your Tier 2 suppliers and subcontractors. Primary suppliers regularly subcontract to other suppliers and purchasing agents, particularly in retail, apparel, and "fast fashion." Unfortunately, these Tier 2 and Tier 3 suppliers often operate with very little oversight or consideration around worker human rights, workplace safety, or the environment.

Your ultimate output should be a sustainability "scorecard" for each supplier, and a carbon inventory of your supplier relationships. Once your company knows where its supply chain issues and gaps are, you can set goals, implement supplier programs, work to influence existing partners, and consider establishing new relationships with more sustainable ones.

You have to start somewhere, and we've seen dozens of major global brands (and some of the world's largest procurement organizations) increase their focus and investments in supply chain sustainability, traceability, and transparency further in 2022, including Amazon, Apple, Disney, Nike, Target, Walmart, and many others. We expect this trend to continue and broaden in the coming years, influencing more upstream suppliers and partners to comply with better ESG standards and labor practices.

Value chain sustainability mapping in China. Source: IPE

Your Next Steps with Supply Chain Carbon Accounting

Remember, this work is challenging, and most organizations are undertaking it right now. In a recent survey by The Sustainability Consortium, a non-profit dedicated to improving the sustainability of consumer products, less than 20% of the 1,700 respondents said they have a comprehensive view of their supply chains' sustainability performance. More than half reported being unable to determine top sustainability issues within their supply chain.

Despite these difficulties, in most industries, engaging your supply chain on emissions is one of the most material paths to reducing your own organization's carbon footprint. Your supply chain is the foundation for your organization's sustainability performance and GHG emissions inventory, and it can't be overlooked.

Decarbonizing a global supply chain is complex, and requires internal capacity, resources, investment, and, most of all, time. But, when done well, supply chain leadership boosts everything from local community benefit to your firm's brand, reputation, operating financials, and investor consideration.