Using technology to get on top of Scope 3 emissions
Supply chain sustainability: the complexity of gathering Scope 3 data
Every day we witness the effects of global warming: glaciers melting in the Alps, excessive temperatures damaging runways in the UK, many Southern European countries facing water shortages and Pakistan hit by its worst floods in recent memory. This impacts us all, and we must act quickly to reduce carbon emissions and avoid the catastrophic consequences of climate change.
Regulations like the EU’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) from the IFRS Foundation will make sustainability reporting mandatory and increase the focus on companies’ carbon emission disclosures. Understanding, measuring, reporting, and managing carbon emissions, especially those related to the supply chain (Scope 3), can significantly decrease a company’s risk and be a source of competitive advantage.
Our series of articles focus on how to get on top of Scope 3 emissions using technology. In this first article we focus on the complexities and challenges of measuring and reporting Scope 3 emissions. In subsequent articles we will discuss how technology and different solutions can help solve these challenges to meet the increasingly stringent measurement and reporting standards.
Politicians and regulators are demanding ever higher sustainability standards. Companies are responsible for the environmental pollution they and their suppliers create. They can generate considerable social benefit if they change their practices. At the same time, consumers, especially among the younger generation, are demanding higher sustainability standards from companies and consider a company’s environmental credentials when making purchases. The same is true for those seeking jobs. An additional source of pressure is from investors. They are looking for companies with strong ESG credentials which they see as a source of long-term value creation.
Companies are responding. Most have already invested some time and effort into improving their ESG credentials – but have often discovered that the desired outcome is not so easily achievable. Scope 3 emissions reporting, in particular, is a challenge.
A thorough evaluation of GHG (greenhouse gas) emissions needs to cover three scopes. Scope 1 are direct emissions from energy used in an organisation’s own premises or activities or those it controls, such as energy consumed for heating, lighting or transport. Scope 2 emissions relate to indirect emissions from the consumption of purchased energy: for example, from the generation of the electricity that an organisation consumes. Both Scope 1 and Scope 2 emissions can be measured by a company and are therefore easy to report accurately.
Scope 3 emissions are different. They relate to other indirect GHG emissions generated throughout the organisation’s value chain from activities that are neither owned nor controlled by it. These emissions are the most sizeable, accounting for at least 70% of a company's total carbon footprint, depending on the industry even as high as 95%. The magnitude of these emissions is one challenge; another big challenge is the difficulty involved in measuring them.
Scope 3 emissions are defined by 15 distinct upstream and downstream categories outside the reporting organisation and include purchased goods and services, upstream transportation and distribution, use of sold products or end-of-life treatment of sold products. Scope 3 emissions are therefore by far the most complex and difficult to assess.
Single contributions are already inherently difficult to measure, even more so given that modern value chains are so interconnected. Goods production can provide an example. There is inherent overlap between Scope categories and value chain nodes. Scope 1 and 2 emissions from Company A’s activities are effectively the Scope 3 emissions for the purchased good by Company B: the good produced by a consumer goods company turns into a purchased good at a retailer. This is just one example. The number of transactions and movements that make up Scope 3 emissions is extremely large and very hard to quantify.
If you can't measure it, you can’t manage it. Therefore, despite the complexity of the task, companies need to measure the Scope 3 emissions that are integral to their carbon footprint. Only by doing this can companies set sustainability targets as part of their decarbonisation journey to net zero.
To collect Scope 3 emissions data, companies must work together across the value chain. The challenges of managing supply chain transparency can be broken down into three areas: complexity and dynamism; upstream transparency; and variances in capabilities and control.
Many companies have thousands of tier 1 suppliers and add suppliers each year. Each of these tier 1 suppliers work with their own suppliers, which also generate emissions that need to be reported. Unfortunately, transparency beyond tier 1 is often an issue as data availability is limited and data collection fragmented. Overcoming this issue is problematic from a capability and control perspective since there is often limited supplier awareness and capabilities, and high costs for control schemes beyond tier 1. Companies typically have highly complex, dynamic supply bases involving thousands of suppliers that cut across multiple tiers. Establishing a full picture of Scope 3 emissions requires transparency and visibility beyond tier 1 and across the entire supplier base.
Companies typically use one of four different methods to calculate Scope 3 emissions:
- Spend-based: the economic value is multiplied by industry average emissions factors
- Average data: unit or activity data (mass or other relevant units) is multiplied by secondary emissions factors
- Hybrid: supplier-specific data is used where applicable and is supplemented with secondary data to fill gaps
- Supplier-specific: first-hand data from suppliers is used
Often the only way to solve the data collection problem is to apply average figures or make large assumptions, as in the spend-based scenario. The other extreme is the supplier-specific scenario, which requires tremendous effort and maintenance. To measure their carbon footprint accurately, organisations are progressively shifting from the high-level spend-based approach toward more accurate hybrid models using supplier-specific data wherever possible. Collecting primary data from suppliers can be time-consuming and requires a dedicated approach to supplier engagement which prioritises the suppliers with the most impact.
Deloitte’s approach to supplier engagement
Deloitte’s approach is to evaluate and challenge Scope 3 contributions using three building blocks: supplier segmentation and prioritisation; supplier net-zero maturity assessment; and supplier onboarding towards the development of a collaborative net-zero ecosystem.
In most instances a subset of suppliers accounts for 80% of the indirect Scope 3 GHG emissions. Supplier segmentation and prioritisation makes it possible to identify the primary contributors. Deloitte helps its clients define their sustainability KPIs and category benchmarks to map the different suppliers, pursue a detailed supplier KPI assessment and develop a roadmap that stimulates target tracking and fulfilment. Carrying this out requires sufficient transparency on supplier data and emissions.
As a next step, Deloitte advises clients to understand the current maturity of their main suppliers and partner with them to develop their own net-zero roadmap and areas for improvement. Deloitte conducts a maturity assessment and develops tailored approaches for suppliers with limited or low maturity emissions awareness and high emission-saving potential. Companies should track their suppliers’ net-zero maturity in four main areas: targets, governance, initiatives, and collaboration. Potential data sources to be utilised for this assessment could be the commitment of a company to net-zero status and GHG reduction targets, any ESG ratings or CDP submissions, as well as their approach to their own suppliers’ engagements.
Finally, supplier engagement should entail collaboration with suppliers to master the challenge together; in other words, supplier onboarding and development of the ecosystem come into play. During the partnership with the suppliers, companies should follow a structured and tailored method consistent with their own sustainability aspirations. Deloitte advises its clients to identify suppliers’ spending patterns, commitments, targets and action plans. Companies should focus on segments where the maximum impact can be achieved. Once the action plan is in place, the progress made and outcomes should be continuously reported and monitored as part of ongoing ecosystem development.
The three building blocks – supplier segmentation and prioritisation; supplier net-zero maturity assessment; and supplier onboarding – cover supplier engagement from a methodological point of view. But technology inevitably plays a major role in the supplier engagement process as it provides the means to collect and monitor data while providing information to understand and evaluate progress. In the next article of our series we will analyse the technology available in the market to help measure, manage and report Scope 3 emissions.
We would be pleased to help you pave the way towards managing Scope 3 in your organisation. Please do not hesitate to reach out to us.
This article has been authored by Peter Vickers, Carlos Sanchez, Dennis Schulz and Samuel Hawkins.