Scope 3 Value Chain Emissions Reduction

A company's value chain is the full range of activities it performs 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, value chain emissions often represent the majority of a company's total environmental footprint. In carbon accounting terms, value chain emissions are 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'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).

Defining Scope 3 Value Chain Emissions

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

For many companies - particularly companies with a physical product and supply chain - Scope 3 emissions represent 80% or more of the company's carbon footprint. Scope 3 is also the most difficult category to accurately and fully measure.

Certain Scope 3 categories, like business travel and employee commuting, are easier to quantify. Data for other Scope 3 categories like purchased goods and services or end-of-life treatment of sold products may require complex modeling, inputs, and assumptions - and can be challenging to calculate. Depending on your value chain, not all 15 categories will be relevant to your company.

Why Scope 3 Value Chain Emission Measurement's So Important

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

Source: McKinsey

As you likely already know, value chain emissions management is complex. It requires a holistic view of all the suppliers, processes, logistics, and raw materials involved in manufacturing and delivering your products to customers, 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 limit your company’s Scope 3 emissions.

But value chain sustainability isn’t just about risks and challenges. It also presents historic opportunities to make and distribute more appealing, durable, valuable, and differentiated products, invent (or reinvent) new products, reduce costs, protect the environment, and elevate your company’s brand. Products and packaging can become biodegradable, compostable, or even upcycled from other products’ waste. The entire world benefits - both now and in the future.

Take Nike, the world’s leading shoe brand. By changing how some of its shoes are made - thereby reducing the labor costs and materials used - Nike increased company-wide profit margins 0.25% (almost $50 million) via more sustainable product design and value chain practices.

The Nike Zoom Alphafly Next Nature shoe uses at least 50 percent total recycled content by weight. Source: Nike

Many other companies, including Unilever, Walmart, Dow, McKesson, and Medtronic have all achieved operational cost savings from efficiency projects and sourcing initiatives that also reduced their value chain emissions.

7 Actionable Steps to Reduce Value Chain Emissions

For companies looking to embed environmental responsibility and emissions reduction across their value chain, here are some learnings, observations, and examples to help you cut through the complexity and reduce your Scope 3 emissions.

Here are Brightest's seven steps to audit, assess, and reduce emissions across your value chain:

1. Achieve better value chain transparency to set priorities, assess risks, and target opportunities
2. Audit your products and conduct LCAs
3. Identify efficiencies and optimization opportunities
4. Set better value chain standards (and help your partners meet them)
5. Adopt and implement closed-loop and circular value chain models
6. Improve value chain sustainability measurement and data capacity
7. Make sure your organization isn’t sabotaging its own sustainability efforts

1. Achieve better value chain transparency to set priorities, assess risks, and target opportunities

For most companies that make and sell physical goods and products, your value chain will follow this pattern or structure:

Simplified Sustainable Value Chain

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 value and supply chain sustainability system like Brightest.

Define and agree on your key value chain sustainability KPIs early on in the process. Find the right balance between internal goals and science-based sustainability targets, global sustainability reporting standards, supplier ESG surveys, and trusted third party advice to determine what to measure (and how). We recommend considering at least these themes as a starting point:

If your organization's operating at scale, it's likely your value 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, value chain sustainability 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 data and insights on their material business practices, operations, and environmental footprints. Try to understand what they do and don't measure. Educate them on why value chain emissions matter to your business and theirs.

Look to supplement your direct supplier engagement with perspective and data from other stakeholders as well. Apple anonymously surveys nearly 200,000 workers at its suppliers facilities about their working conditions and experience, across 135+ factories. Work with human rights, trade, municipal, and grassroots organizations in the countries your suppliers are located to asess the full picture.

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 risk matrix, database, and program strategy encompassing your value chain partners, priorities, risks, areas for improvement, and aggregate environmental footprint. Once your company knows where its value 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 value 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

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 value chains' sustainability performance. More than half reported being unable to determine top sustainability issues within their value chain.

2. Audit your products and conduct LCAs

Beyond assessing your suppliers, take steps to investigate and understand your products' full Scope 3 journey through lifecycle analysis (LCA) projects. Trace and link materials to your different suppliers, and work to understand each component's environmental footprint. From there, you're better positioned to understand the right levers to improve product-level sustainability (and, often, costs) in the context of your value chain strategy. A product carbon footprint analysis is one type of LCA, so decide how narrow or broad your lens needs to be.

For example, LCAs can guide an LED light bulb manufacturer to replace their light bulb's aluminum with recycled aluminum, or even replace aluminum completely with a less carbon-intensive material like glass. A CPG brand might prioritize compostable, plant-based or post-consumer recycled (PCR) packaging. A product traditionally made from plastic may not need to use plastic as a raw material at all.

For an apparel brand like Levi's, an LCA for a pair of jeans will consider the environmental impacts of cotton all the way through their clothes being washed, dried, and discarded or recycled by customers.

Source: Levi's

Starting with your leading SKUs, focus on four elements:

1. An inventory of all the materials that go into making the product
2. All the value chain steps and processing required to transport and turn your materials into finished goods, then deliver them to customers
3. Your product's end-of-life treament and steps. Is it discarded, recycled, up-cycled? How sustainable or "circular" is the product lifecycle?
4. The environmental and social impacts at each step for each input

Make sure to consider your product, each input ingredient, and its related environmental impacts and intensity across all 15 Scope 3 categories, including:

1. Raw Material Cultivation, Sourcing, or Extraction
2. Manufacturing & Processing
3. Transportation
4. Retail & E-Commerce
5. Usage
6. End-of-Life & Waste Disposal

In their initial 501 Jeans LCA, Levi's identified six material LCA themes (and KPIs) to measure the product's lifecycle impact.

Source: Levi's

Define a scope, inventory your materials, inputs, ingredients, and packaging, map everything you can to its associated value chain, and focus on (a) the biggest or most material positive changes you can make, as well as any (b) quick, easy wins. Make sure to request LCAs from your own suppliers as well for raw materials. More large brands are asking vendors and suppliers for product LCAs, so the more thorough you are now, the better prepared you'll be to secure future business.

LCAs can get very complex very quickly, and there will always be data gaps, uncertainties, and assumptions. No LCA is perfect, but the better you understand your products within a certain confidence interval, the better equipped you and your organization will be to ask smart questions, make better decisions, and engage your suppliers and other stakeholders more effectively on sustainability and other issues.

3. Identify efficiencies and optimization opportunities

Sustainability is based on principles of balance, regeneration, and efficient use of resources - many of the same qualities of an effective, efficient value chain. While identifying specific opportunities will vary based on your business, industry, and geographic footprint, revisit the same value chain and LCA steps to look for material opportunities and cost savings, then embrace creativity, engineering, and innovation.

Examples might include:

1. Implementing energy efficiency and renewable energy projects at owned facilities, and encouraging, advocating, or even financing them at leased and third-party sites
2. Sourcing raw materials closer to the plant that manufactures it
3. Sourcing a greater percentage of recycled and upcycled raw materials for products and packaging
4. Improving and reducing the emissions intensity of your raw material transportation
5. Recycling and re-using water, waste, and other byproducts from operations
6. Helping your customers re-use, recycle, or return their used products for more sustainable end-of-life treatment
7. Partnering - and even financing - to implement sustainability improvements in strategic parts of your value chain

Recognizing denim's a water-intensive process, retailer Everlane adopted a closed water system using high-efficiency jet washing machines. The washers only lose 0.4 liters to natural evaporation, and the rest is recycled, compared to 1,500 liters of water for traditional denim. A filtration process extracts contaminents from the water, and the rest of the water can be re-used. The washing facility's powered by 5.3 million kilowatt hours (kWh) of solar power each year, allowing it to operate at only 20% of the CO₂ footprint vs. a conventional fast fashion facility.

Source: Everlane and Saitex

Terrapin brewery, a beer brand in Athens, Georgia, takes similar value chain conservation steps with its water and waste. Recognizing its brewery waste has agricultural applications, Terrapin's even created a new revenue stream by helping local farmers buy and use the brewery's waste output.

4. Set better value chain standards (and help your partners meet them)

To codify sustainability within your value chain and procurement practices, design, communicate, and use a supplier code of conduct that reflects your organization's sustainability targets and ESG goals.

What you prescribe is up to you and should fit the needs and realities of your business, but at a minimum include requirements for waste disposal, hazardous materials, energy and water use, as well as human rights and labor practices.

Supplier relations is an ongoing dialogue, and your organization will have varying degrees of influence in a specific value chain. When working with suppliers on sustainability initiatives, it's important to be clear, consistent, and understanding:

1. Engage your CEO, CFO, or Chief Procurement Officer (CPO) in this communication process. Make it clear to your suppliers this is a company-wide initiative and top priority.
2. Ask your suppliers what they're doing currently around sustainability and human rights, and what policies and controls are already in place now. In many cases, your larger and more strategic suppliers will already have been approached by their other value chain relationships around similar initiatives.
3. Educate each supplier on why sustainability matters for your business and stakeholders, as well as why investing in sustainability is beneficial to their business as well. Cite other brands and examples. Highlight the opportunities and risks of inaction.
4. Also work to engage your Tier 1 and priority suppliers around their value chains. Who are their suppliers? What are their procurement policies? Where are the biggest lower-tier risks, issues, and opportunities for improvement?

Once you've established one or more sustainable value chain programs, work with your suppliers to implement best practices:

1. Introduce your Sustainable Value Chain Code of Conduct and policies up front. Make it publicly available on your website. Include it in contracts and RFPs. Track which suppliers have reviewed and signed on.
2. Help suppliers establish long-term sustainability goals and science-based targets.
3. Include your suppliers' suppliers within these sustainability programs.
4. Request each supplier designate a sustainability lead and primary point of contact on their staff to work with you to extend the sustainability program(s) to lower-tier suppliers.
5. Offer training to suppliers and provide them with incentives for implement sustainability practices and building capacity
6. Offer co-investment or supportive financing to help your strategic suppliers implementing sustainability practices like renewable energy, energy efficiency, and closed-loop processes (if your organization has the means).
7. Conduct annual reviews and solicit feedback from your suppliers on how to improve.
8. Use independent audits, verification steps, and data checks.

For example, in 2021 Hewlett-Packard (HP) launched a new Sustainable Bond Framework, which the company will use to issue bonds to help finance HP sustainability projects. The company plans to issue up to $2 billion in sustainable bonds, and one use of proceeds will be projects that help decarbonize its value chain. Similarly, Unilever and Campbell Soup Company offer their farmers technologies, guidelines, and products to help them optimize their fertilizer and water use and improve soil conservation.

5. Adopt and implement closed-loop and circular economy models

In sustainability, closed-loop systems reuse and recycle raw material outputs as inputs back into the manufacturing process.

Source: Catherine Weetman

For example, beer brewer Sierra Nevada uses a closed-loop approach in the company’s Chico, California facilities. The waste generated from brewing beer is composted back into the soil used to grow new barley and hops to make future beer. When consumers recycle the company's beer cans, the aluminum can be further salvaged and re-used for future products.

Source: Sierra Nevada

As you reduce value chain emissions and improve your sourcing visibility through LCAs, audits, surveys, and other projects, look for opportunities to adopt or reinvent circular processes. Often, circular and closed-loop processes not only decrease your organization's environmental impacts, but also lead to cost savings or even new revenue streams.

Source: Closed Loop Partners

Many common product ingredients and inputs like water, glass, and aluminum are almost infinitely recycleable with the right process, making them perfect for closed loop and circular engineering. Even "imperfectly circular" materials like paper and plastic can be re-used, reduced, and recycled, while opportunities to compost food waste are immense.

Beyond materials, closed loop strategies also extend to business models. Dozens of global brands including Procter & Gamble, Nestlé, Unilever, PepsiCo, Mondelēz International, and Danone are nowing using the Loop recommerce platform, which distributes the brand's products to customers in durable packaging that is collected, cleaned, refilled, and reused after use.

Rent, recommerce, refill, and reuse-based circular product delivery models will increasingly become an accepted - and, perhaps in the near future, required - part of doing businss.

6. Uplevel your value chain ESG data

From assessing supplier risks and product-level environmental impacts to measuring and forecasting GHG emissions across your value chain, accurate data is a critical component for value chain decarbonization. To calculate Scope 3 emissions, you need to engage the support and resources necessary to collect, organize, and understand the data your organization gathers throughout its value chain - no easy task given the scale and complexity we've already outlined.

According to a 2021-2022 study by Accenture and the United Nations, 63% of CEOs say difficulty measuring ESG data across their value chain is a barrier to achieving sustainability in their industry.

If your organization doesn't already have value chain sustainability goals and targets, start by determining what they should be and how you'll track them. Most organizations will set upstream goals around KPIs like:

1. Overall supplier performance and risk vs. your company's code of conduct and corporate sustainability targets
2. The percentage (%) of suppliers that have completed an environmental assessment (and passed)
3. The percentage (%) of suppliers that have received material third party certification
4. The percentage (%) of suppliers that have adopted emissions, water, and other science-based sustainability targets
5. The percentage (%) of first-tier suppliers by spend and materials quantity powered by renewable energy and other closed-loop processes
6. Your supply chain's greenhouse gas (GHG) emissions
7. The number of suppliers completing corrective action plans

All of this information should feed an overall supplier sustainability rating and risk assessment system so you're able to see and rank suppliers based on their environmental performance (and contribution to yours). If you need a system to gather and centralize this information (and don't have one in place), Brightest offers a unified set of supply chain sustainability tools to help your organization set goals, engage suppliers, run environmental surveys, and track performance.

Don't underestimate the effectiveness of quality technology backed by a thoughtful strategy and good supplier relations for overcoming value chain transparency challenges. According to McKinsey, "in our observation, companies that instituted control towers and other digital solutions before COVID-19 were better able to navigate the crisis than those that had not. The companies had better tools, data, and visibility into their value chains, allowing them to identify and move early on both problems and opportunities."

Target's Chief Risk Officer Don Liu backs up that assessment: "We find ourselves not only learning the political environment in which we work, not only at the national level, but the international level. We have to invest in technology because responsible sourcing requires us to know the ingredients that go into our products and to be able to do due diligence on the vendors [and] the conditions under which vendors’ employees are working."

7. Make sure your organization isn’t sabotaging its own sustainability efforts

While we've shared many examples where an organization's value chain emisions targets can operate in harmony with its financial goals and business objectives, there are times when sustainability may find itself at odds with other, competing needs and priorities. We might want to order materials in advance and ship them as cost and carbon-effectively as possible, but perhaps there's a last minute rush to fulfill a large order and it needs to be air shipped overnight instead. These tensions will - and do - exist.

While these challenges can be politically sensitive, it's important to recognize and speak openly about them wherever possible. Often, less sustainable decisions happen inside organizations because the person or team making the decision doesn't realize there's a more environmentally-friendly alternative - or doesn't have the right framework for a full cost-benefit analysis. Internal sustainability education and stakeholder engagement is just as important as your supplier communications.

Overall, the more your organization aligns its emissions targets with its operating goals, policies, and brand purpose, the easier it is to point out inconsistencies and assign corrective action. If there is incompatibility between sustainability or ESG targets and other operational motions, you may need executive stakeholder support to balance these competing priorities and clarify decision-making.

Ultimately, your value chain is the foundation for your organization's overall sustainability performance and GHG emissions inventory. Decarbonizing a global value chain is complex, and it requires internal capacity, resources, investment, and, most of all, time. But, when done well, value chain leadership boosts everything from your firm's brand and reputation to employee morale and retention, operating financials, and risk management efforts.