A supply chain is integral to business operations, yet it significantly contributes to environmental degradation. Notably, eight major supply chains account for over 50% of global greenhouse gas emissions.
These emissions, categorized as Scope 3 under the Greenhouse Gas (GHG) Protocol, encompass indirect emissions throughout a company’s value chain, both upstream and downstream.
Despite this, many companies have been slow to address the environmental impacts of their supply chain. A typical consumer company’s supply chain is responsible for more than 79.9% of its greenhouse gas emissions and over 89.9% of its impacts on the environment, including geological resources, biodiversity, water, land, and air.
In this article we delve into the complexities of supply chain emissions, emphasizing the necessity for businesses to understand and mitigate their environmental impact. It explores the challenges and opportunities in achieving sustainable supply chains, showing the critical role of emissions management in corporate sustainability efforts.
Scope 1, Scope 2, and Scope 3 Emissions
- Scope 1 (Direct Emissions): Emissions from sources owned or controlled by the company, such as company-owned vehicles or on-site fuel combustion.
- Scope 2 (Indirect Emissions): Emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the company.
- Scope 3 (Other Indirect Emissions): All other indirect emissions that occur in a company’s value chain, including both upstream and downstream activities.
Categories of Scope 3 Emissions
Scope 3 emissions are divided into 15 categories to provide a comprehensive view of a company’s carbon footprint:
- Purchased Goods and Services: Emissions from the production of goods and services acquired by the company.Example: A clothing retailer’s emissions from the manufacturing of textiles by suppliers.
- Capital Goods: Emissions from the production of long-term assets such as buildings, machinery, and equipment.Example: A tech company’s emissions from the manufacturing of servers and computers used in its operations.
- Fuel- and Energy-Related Activities (Not Included in Scope 1 or 2): Emissions related to the production of fuels and energy purchased and consumed by the company.Example: Emissions from the extraction and transportation of coal used to generate electricity that a company purchases.
- Upstream Transportation and Distribution: Emissions from the transportation and distribution of goods purchased by the company, occurring before ownership is transferred.Example: A furniture company’s emissions from shipping raw materials from suppliers to its manufacturing facilities.
- Waste Generated in Operations: Emissions from the disposal and treatment of waste generated by the company’s operations.Example: A restaurant chain’s emissions from the disposal of food waste and packaging materials.
- Business Travel: Emissions from employee travel for business purposes in vehicles not owned or controlled by the company.Example: A consulting firm’s emissions from employees flying to client locations.
- Employee Commuting: Emissions from the transportation of employees between their homes and workplaces.Example: A corporation’s emissions from employees driving personal vehicles to the office.
- Upstream Leased Assets: Emissions from the operation of assets leased by the company, not included in Scope 1 or 2.Example: A retail store’s emissions from energy use in a leased building where it operates.
- Downstream Transportation and Distribution: Emissions from the transportation and distribution of products sold by the company between its operations and the end consumer.Example: An electronics manufacturer’s emissions from shipping products to retailers.
- Processing of Sold Products: Emissions from the processing of intermediate products sold by the company by third parties.Example: A steel producer’s emissions from steel being further processed by a car manufacturer.
- Use of Sold Products: Emissions from the use of goods and services sold by the company.Example: An automobile manufacturer’s emissions from fuel combustion in vehicles sold to customers.
- End-of-Life Treatment of Sold Products: Emissions from the disposal and treatment of products sold by the company at the end of their life.Example: A consumer electronics company’s emissions from the disposal of smartphones by users.
- Downstream Leased Assets: Emissions from the operation of assets owned by the company and leased to other entities, not included in Scope 1 or 2.Example: A company’s emissions from energy use in buildings it owns and leases to other businesses.
- Franchises: Emissions from the operation of franchises not included in Scope 1 or 2.Example: A fast-food corporation’s emissions from energy use in franchised restaurant locations.
- Investments: Emissions associated with the company’s investments in other companies or projects.Example: A venture capital firm’s share of emissions from the operations of companies in its investment portfolio.
Importance of Addressing Supply Chain Emissions
Supply chain (Scope 3) emissions often constitute the largest portion of a company’s total greenhouse gas emissions, sometimes accounting for over 70% of the carbon footprint.
By focusing on these emissions, companies can:
- Identify High-Impact Areas: Pinpoint stages in the supply chain with significant emissions to target reduction efforts effectively.
- Collaborate with Suppliers: Work with suppliers to adopt sustainable practices, such as using renewable energy or improving energy efficiency.Example: Walmart’s Project Gigaton aims to reduce a cumulative one billion metric tons of GHGs from its supply chain by 2030, collaborating with suppliers to help them transition to renewable energy and improve energy efficiency.
- Enhance Transparency: Meet stakeholder and regulatory expectations by providing comprehensive emissions reporting.
- Contribute to Climate Goals: Align with global efforts to mitigate climate change by reducing overall greenhouse gas emissions.
Strategies for Managing Supply Chain Emissions
1. Measure and Segment the Footprint
Accurately assessing emissions across the value chain is essential for identifying key areas for improvement. This process involves:
- Data Collection: Gather detailed information on emissions from all activities within the organization and its supply chain, including direct emissions (Scope 1), indirect emissions from purchased energy (Scope 2), and other indirect emissions (Scope 3) that occur in the value chain.
- Segmentation: Classify emissions by source, activity, or department to pinpoint high-impact areas, enabling targeted strategies for emission reduction.
- Utilizing Carbon Accounting Methods: Employ methodologies such as direct measurement-based approaches or extrapolation-based models to estimate emissions accurately, depending on data availability and desired accuracy.
2. Engage Suppliers
Collaborating with suppliers is crucial for reducing supply chain emissions, as a significant portion of a company’s carbon footprint originates from its supply chain. Effective supplier engagement involves:
- Communication: Clearly convey sustainability goals and expectations to suppliers, discussing the importance of reducing emissions and how it aligns with the company’s objectives.
- Capacity Building: Provide resources, training, and support to help suppliers measure and reduce their emissions, sharing best practices and offering technical assistance.
- Incentivization: Offer incentives, such as long-term contracts or financial benefits, to suppliers who demonstrate a commitment to sustainability and achieve emission reduction targets.
- Collaboration: Work jointly with suppliers to identify opportunities for emission reductions, such as improving efficiency, switching to renewable energy sources, or redesigning products for reduced environmental impact.
3. Implement Responsible Sourcing Practices
Adopting responsible sourcing involves integrating environmental and social considerations into procurement decisions. This ensures that suppliers adhere to sustainable practices, thereby reducing overall supply chain emissions.
Example: Unilever has established sustainability agreements with its top retail customers, including Walmart, focusing on reducing greenhouse gas emissions and waste in its supply chain. These collaborations aim to address Scope 3 emissions, which are indirect emissions from supply and distribution chains.
4. Optimize Transportation and Logistics
Transportation is a significant contributor to supply chain emissions. Optimizing logistics by selecting efficient routes, consolidating shipments, and choosing lower-emission transportation modes can substantially reduce carbon footprints.
Example: Fashion brands like Veja and Reformation are shifting away from air transport to reduce emissions, with Veja notably banning air transport for its products entirely. This move helps decrease the carbon footprint associated with product transportation.
5. Invest in Carbon Capture and Renewable Energy
Investing in carbon capture technologies and renewable energy sources can offset emissions that are otherwise challenging to eliminate. Such investments demonstrate a commitment to sustainability and can inspire industry-wide change.
Example: Companies like Google and Salesforce have invested in plans to capture CO₂ emissions from industrial processes, such as those at paper mills and sewage treatment plants. These initiatives aim to offset carbon pollution and contribute to broader environmental goals.
6. Set Clear Goals and Monitor Progress
Establishing specific, measurable targets for emissions reduction across the supply chain is crucial. Regular monitoring and reporting ensure accountability and help in assessing the effectiveness of implemented strategies.
Example: PepsiCo aims for a 40% reduction in supply chain emissions by 2030. Initiatives such as the Sustainability Action Center and regenerative farming programs are pivotal in this journey, emphasizing the importance of supplier collaboration and specific emission-reduction commitments.
Forward-Thinking Businesses
By adopting these strategies, companies can make significant strides in reducing their supply chain emissions, contributing to global sustainability efforts and meeting stakeholder expectations for environmental responsibility.
From an economic perspective, effectively managing supply chain emissions presents both challenges and opportunities for businesses. Implementing sustainable practices may involve initial investments in technology, process optimization, and supplier engagement, potentially increasing operational costs in the short term. For instance, the dairy industry faces significant financial challenges in reducing methane emissions, with costs estimated at around $35 million annually, impacting farmers’ margins by about 13% of their income.
However, these expenditures can lead to long-term economic benefits. Companies that proactively reduce their carbon footprint can enhance their brand reputation, meet regulatory requirements, and gain a competitive advantage in markets increasingly favoring environmentally responsible products. Moreover, optimizing supply chains for sustainability can result in operational efficiencies, such as reduced energy consumption and waste, leading to cost savings over time. For example, reshoring—bringing production back to domestic facilities—has been shown to be economically profitable and can positively impact greenhouse gas emissions.
Furthermore, as global policies increasingly favor low-carbon economies, companies with sustainable supply chains are better positioned to adapt to future regulations and avoid potential carbon taxes or penalties. Engaging in green supply chain management can also stimulate innovation, opening new markets and creating job opportunities in emerging green industries. For instance, integrating environmental considerations into supply chain management has been linked to green innovation, contributing to both environmental and economic performance.
While the transition to sustainable supply chain practices requires careful economic consideration and strategic investment, the potential for long-term economic gains, risk mitigation, and alignment with global sustainability trends makes it a prudent course of action for forward-thinking businesses.