Scope 3 reductions: The role of brands in decarbonizing the value chain

In brief:

• In a context where value chain decarbonization initiatives are still emerging, businesses may find themselves in a situation where the demand for sustainable products is higher than the offer, making it impossible to meet their scope 3 abatement targets. Those who delay engaging with their suppliers risk falling short of their targets and lagging behind their competitors.
• Strategic co-development and co-investment opportunities between brands and suppliers can generate significant value and reduce negative impacts, thus creating mutual benefits while promoting value chain decarbonization.
• The use of traceability systems, allowing businesses and their suppliers to quantify, track and create mutual benefit, is essential for successful implementation. Activating these concepts will facilitate accurate reporting and transparency of scope 3 emissions while also supporting scalability and efficiency in decarbonization efforts.
• The focus should be on establishing long-term partnerships that include aligned KPIs and working together toward shared sustainability goals.

Businesses are well aware of the importance of reducing their carbon footprint. Typically, a significant portion of the problem comes indirectly through suppliers’ footprints. These indirect emissions, known as scope 3 emissions or supply chain emissions, make achieving sustainability goals and requirements far more complicated, as they lie outside of businesses’ direct control.

To address this, brands need to proactively engage their suppliers to develop an action plan for effective scope 3 reductions in a way that incentivizes both parties. Co-developing sustainable practices and investing in innovative solutions with suppliers can yield mutual benefits and create significant and lasting value.

Fortunately, despite the common misconception that suppliers lag behind, many are actually quite advanced in their sustainability practices. They know change is coming, and some are already making active efforts towards emissions reductions. However, the level of maturity in these practices can vary significantly, depending on the industry and region.

Through co-development or co-investment strategies, companies can establish robust frameworks for collaboration, ensuring accurate and transparent reporting of scope 3 emissions that serve both parties.

What are scope 3 emissions, and why do they matter?

Simply put, the greenhouse gas emissions (GHG) generated through a business’s operations fall into three categories:

• Scope 1 emissions, also known as direct emissions, are generated by assets that are either owned or directly operated by a company.
• Scope 2 emissions are indirect GHG emissions generated through the purchase of electricity and energy sources that are produced off-site.
• Scope 3 emissions, also called supply or value chain emissions, are indirect emissions that arise from all other supply chain activities, up to and including consumer purchases.

Since scope 3 emissions are almost entirely out of the direct control of the company, ensuring compliance can be incredibly challenging.

Yet doing so is critical—especially since emissions produced through the supply chain are, on average, 26 times higher than operational emissions.

Without sufficient scope 3 reduction efforts in the supply chain, companies may find themselves in a situation where the demand for sustainable products is higher than their suppliers can provide, making it impossible to meet their reduction targets.

Suppliers may also find themselves in financial peril. According to the 2020 Carbon Disclosure Project (CDP), the monetary impact of environmental risks on suppliers is projected to reach $1.26 trillion over the next five years. Not surprisingly, many of these risks will result in cost increases. If passed along, corporate buyers could face spikes of up to $120 billion.

With thousands of goods, services and raw materials to manage the transformation of, it can be difficult to track scope 3 emissions, which is why supplier collaboration is so pivotal. By identifying joint development opportunities and aligning relationships toward shared sustainability goals, brands and suppliers can realize mutual benefits within the concept of value chain decarbonization.

The 3 pillars of supplier sustainability engagement

QUANTIFY: Drive and measure impact reduction at scope 3 supplier level

The first step in developing an integrated value chain decarbonization strategy involves ensuring strategic alignment and piloting innovative solutions to help future-proof sustainability efforts.

Companies and their suppliers should come together to decide on a methodology that’s as robust as possible and aligned with industry standards. Standards such as the GHG protocol and the Science Based Targets initiative (SBTi) are regularly updated to incorporate the latest science and input from various sectors.

In the context of scope 3 emissions, future-proofing requires aligning sustainability efforts with these evolving industry standards, which helps maintain credibility and prevent noncompliance.

However, quantifying value chain abatement – GHG emissions reduction and/ or an increase in carbon sequestration – can add another layer of complexity. As such, companies should hone in on robust tools, such as GHG emissions calculators and carbon sequestration models, as well as industry best practices for Monitoring, Reporting and Verification (MRV) protocols. Quantis’ Tracking Progress in the Supply Chain report can serve as a guide for companies on when and where adjustments are necessary.

TRACK: Transfer impact generated at supplier level throughout the value chain

To maintain transparency and build stakeholder trust, companies need credible and verifiable methodologies for reporting scope 3 emissions across the value chain.

At the end of the day, it’s not just about helping suppliers do a better job. Businesses must also connect the dots between what they are buying and where they are buying from. Thus, it’s important to have a system in place to document and track attributes, as they’re not physically attached to the product.

Chain of custody systems are effective at connecting these virtual attributes to the physical flow of products across the entire value chain. These systems track and document the passage of goods and their associated attributes from one party to another at each step of the supply chain.

There are two models of chain of custody that can ensure physical traceability: segregated and mass balance.

Segregated chain of custody requires physical segregation, which can be expensive. The mass balance chain of custody offers increased flexibility by allowing different flows to be mixed while maintaining segregated bookkeeping of the specified attributes.

It’s important to note that there’s been some confusion around the term mass balance. Companies frequently use this term to describe any scope 3 reporting system where volumes of inputs and outputs are balanced. However, a mass balance chain of custody specifically refers to systems aligned with ISEAL or ISO standards, which include precise reconciliation mechanisms at all stages in the value chain.

Interestingly, the integration of mass balance chain of custody models with the sourcing region approach, as introduced by the draft Greenhouse Gas Protocol Land Sector and Removals Guidance (GHGP LSRG), offers significant potential. This method allows for traceability and the measurement of climate performance at a regional level, rather than focusing solely on individual suppliers. By pooling resources and data from a defined region, this approach enhances the efficiency and scalability of a company’s scope 3 decarbonization strategy. The concept is relatively new, and guidance is forthcoming, but some forward-thinking businesses are already anticipating and implementing it.

In any case, businesses should be cautious about which method they choose to ensure that what they’re doing is traceable and will contribute to Scope 3 emission reductions. Failing to do so could lead to inaccurate reporting, reputational damage and potential legal and financial risks.

TRADE: Accelerate decarbonization efforts through adequate compensation and incentive mechanisms

To encourage suppliers to actively participate in scope 3 decarbonization, companies should consider providing financial and non-financial incentives to help mitigate any downside risks on the supply side.

These incentives must create long-term value to be most effective. A one-time subsidy or temporary sustainability project won’t bring about the kind of change necessary to reach global targets. Long-term purchase agreements and ongoing support for suppliers creates a solid foundation for constructive discussions and opens the door for future opportunities.

To establish and nurture longstanding initiatives, companies may need to start with more carrot-based incentives, then navigate towards outcome-based incentives as suppliers mature. For instance, supplier sustainability engagement might begin with practice-based incentives for trying new technologies or approaches and then evolve into more results-based “pay for performance” incentives for delivering on expected results.

Creating a Win-Win Model

Both buyers and suppliers stand to gain significantly from shared decarbonization efforts. By collaborating on reducing the emissions profile of products, both parties can enhance their sustainability reputations and appeal to environmentally conscious consumers. Joint development opportunities and shared sustainability investments can lead to innovative solutions, cost savings and improved operational efficiency. These shared successes foster trust, loyalty and a long-term commitment to the partnership.

When suppliers understand the direct link between their data contribution and the overall success of the decarbonization initiative, they’re more likely to prioritize data sharing and accuracy. This transparency benefits both parties by strengthening the supply chain, mitigating risks and building a foundation for future collaboration.

Transparency and trustworthiness are key

Transparency is fundamental to bringing about any type of change, whether it’s related to climate, soil resilience, biodiversity, water management or other nature-related risks. Organizations need to address the status of internal sustainability efforts and track trustworthiness to bring about meaningful change.

Specifically, transparency in reporting builds trust with stakeholders, driven by pressure from consumers and civil society. There’s growing awareness around climate change and environmental issues, leading to a push for transparency in the supply chain. This is particularly important for addressing climate impact, as its effects are felt globally. Companies who prioritize transparency can maintain credibility and avoid repeating past mistakes.

With greater attention to transparency and accountability, companies need a robust foundation for effectively decarbonizing their value chains, rather than relying on short-term solutions – such as offsetting and compensation mechanisms.

To foster transparency in the supplier-client relationship, consider these concrete steps:

Shared data access: Granting suppliers access to relevant company data can facilitate joint problem-solving and trust-building.

Joint goal setting: Collaboratively define clear sustainability targets and metrics to track progress transparently.

Regular performance evaluations: Establish a system for assessing supplier performance against sustainability goals and sharing findings openly.

Third-party audits: Consider involving independent auditors to verify sustainability claims and build credibility.

Open communication channels: Maintain regular and transparent communication with suppliers about sustainability expectations and progress.

Long-term partnerships and consistency provide a practical pathway for companies to enhance transparency and accountability. While spot buying remains a common (and sometimes necessary) practice for many businesses, moving towards stable relationships with specific source locations can build greater trust. By fostering these longer-term partnerships, businesses and their suppliers can better collaborate on reducing scope 3 carbon emissions and progressing shared sustainability goals.

Starting the conversation

Communication between businesses and their suppliers can be quite complex, especially when transitioning from discussions about purchasing to more sustainable topics like scope 3 reductions. Nevertheless, these conversations must be broached – and sooner rather than later.

To start, internal teams should have the right education on how to start a dialogue with suppliers, considering and aligning KPIs, which are important for measuring performance at both company and individual levels. If there’s no compensation for added tasks, it may not be worth the effort for employees. This is true for both brands and their suppliers.

Crucially, sourcing teams need to upskill to effectively engage with suppliers. Often, sourcing teams find themselves negotiating with suppliers who possess a deeper understanding of supply chain decarbonization. By enhancing their knowledge in this area, sourcing teams can become more strategic partners and drive meaningful change.

Building a better future, together

Businesses aiming to achieve their sustainability goals need to address their scope 3 emissions. Mutual decarbonization efforts, including investments in innovative practices, can offer substantial returns by future-proofing operations, enhancing corporate reputation and meeting growing stakeholder demands for environmental responsibility.

By proactively engaging suppliers in joint development opportunities and shared sustainability investments, businesses can facilitate effective strategies for scope 3 reduction. Through consistent effort and collaboration, brands and their suppliers can achieve significant progress toward their shared sustainability targets, driving mutual business benefits of cost savings, risk mitigation, and competitive advantage.