As enterprise businesses take steps to operate more sustainably, many are looking for ways to address the full breadth of their climate impact. In addition to giving an overview of the different emissions scopes, this article explains why scope 3 – which has commonly been ignored in the past – must be top of mind for enterprise business in 2022 and beyond, in addition to signalling a solution to tackling upstream value chain emissions.
When it comes to climate, emissions ‘scopes’ refer to categories of emissions, segmented by origin, that a company generates over the course of its end to end operations.
Scope 1 covers emissions from sources that a company directly owns or controls, such as its own sites and vehicles.
Scope 2 can be thought of as ‘HVAC’ emissions, referring to emissions generated by purchased electricity, steam, heating, and cooling that the company uses for its operations.
Scope 3, quite simply, covers everything else – all other indirect emissions that a company generates over the course of its operations, from raw material extraction down to end consumer and disposal.
Though this method of segmenting emissions has been floating around since the Greenhouse Gas Protocol was first published in 2001, many of us have been slow to get up to speed – especially when it comes to scope 3.
Though disclosure of scope 3 emissions is not currently compulsory in the majority of countries and cases, these rules are highly likely to change as pressure ramps up to meet the targets established in the Paris Agreement.
This is because the sheer scale of scope 3 means we are unlikely to meet our shared goals without meaningfully addressing our value chain emissions; scope 3 includes emissions from all business travel and employee commuting, all purchased goods and services, all transportation and distribution both up- and downstream, all investments, all leased assets, waste disposal, and any emissions generated in the use of sold products and services.
With that in mind, it becomes unsurprising that best existing estimates place scope 3 emissions somewhere between 80% and 97% of total emissions for a large business, and for the average large consumer company, 80% of total emissions will sit in the upstream supply chain.
Much like with scopes 1 and 2, many businesses have already begun tackling the areas of scope 3 they can more easily influence. This includes initiatives to reduce employee business travel, implement more effective waste management processes, or establish cycle-to-work schemes that reduce commuting emissions.
The areas that sit further outside of the control of the organisation have received comparatively little attention, by contrast, as external stakeholders are more difficult to influence. As a result, businesses will face an uphill battle to make meaningful reductions when the tide of regulation and legislation turns to make scope 3 reporting and action mandatory.
When we take into account that the majority of total corporate emissions sit in the upstream value chain, it becomes clear that meaningful action on scope 3 cannot be accomplished without effecting widespread change in the supply base. One Vizibl enterprise customer has calculated that in order to reach Net Zero emissions across all scopes, they must be able to exert influence six layers deep in their supply chain.
As a result, procurement and supply chain departments have a huge task on their hands. Sitting at the interface between the business and its wider ecosystem, these functions are fast becoming strategically central to the sustainability agenda. Indeed, the growth of ‘Sustainable Procurement’ in listed member skills on LinkedIn exploded in 2021, with over 330,000 such profiles by mid-December, a month after the COP26 climate conference wrapped up.
This increased integration of the procurement and sustainability functions reflects the truth that new challenges frequently require new ways of working. While procurement has long excelled at managing cost, quality, and compliance, addressing scope 3 emissions requires expansion of this traditional skill set. Now, procurement must balance the benefits of cost optimisation against the value of increased sustainability to the overall business, and work more effectively to influence supply chain stakeholders.
Effective influence of supply chain stakeholders requires an evolution in how we manage our relationships with suppliers and partners. Paralleling procurement’s historical focus on cost and quality, Supplier Relationship Management has traditionally measured suppliers by their operational efficiency, gauging the health of the relationship according to those same cost and quality metrics. As a result, the dynamic has frequently been combative, seeking to hammer suppliers down on price and up on quality year on year to allow the buying organisation to ‘get more for their money’.
To solve for scope 3 emissions and begin realising the business value that sustainability advances bring, a more collaborative approach needs to take precedence. Increased collaboration will ensure procurement’s existing negotiation skill set does not undermine its new goals. This new collaborative approach should prioritise becoming “Customer of Choice” with strategic sustainability suppliers.
Customer of Choice refers to a buyer-supplier relationship where both parties receive priority access to benefits from the other, including increased flexibility, and security. Customer of Choice relationships are founded on transparency and the ethos of mutual benefit – the carrot instead of the stick. Instead of demanding suppliers deliver more for less, this dynamic ensures both parties benefit, allowing trust to develop and a true partnership to form.
Attaining this status with key strategic suppliers supports the delivery of scope 3 emissions reductions in three major ways:
Customer of choice status makes it easier to establish alignment over goals and targets with strategic suppliers.
As many organisations have already realised, sustainability reporting and disclosure can be complex and time-consuming, requiring extensive data and resource to accomplish. This complexity can be a barrier to suppliers’ own action and disclosure, in turn hampering the buying organisation’s ability to influence and report on their scope 3 emissions.
A relationship founded on trust, transparency, and mutual benefit encourages improvement from both parties. Suppliers are incentivised with the promise of benefits such as priority access in return for boosted sustainability credentials. They can also benefit directly from the increased support of a larger organisation with more expertise in emissions disclosure that such a relationship provides.
A Customer of Choice relationship also provides a firm foundation for ongoing collaboration on sustainability projects and programmes.
By encoding transparency and effective communication into the relationship, it becomes easier to establish shared objectives for the partnership and to orchestrate projects across two organisations.
Together, both buyer and supplier can select goals that benefit them both, establish accepted ways of working, embed processes that are accessible to both parties, and measure the effectiveness of their joint projects.
Many large organisations are struggling to tackle value chain emissions in the absence of ready-baked in-house solutions.
By establishing customer of choice relationships with subject matter experts in the supply chain, these businesses can secure priority access to existing IP and future innovation potential within the supply base, allowing them to draw on innovation from key strategic suppliers to solve challenges across their broader supply chain.
With the need to act urgently to avert climate disaster and protect our businesses from reputational shocks associated with poor sustainability credentials, the increased speed to market that supplier innovation provides versus home-grown ideas will confer considerable competitive advantage to those who can harness it.
As they cover the entire value chain, scope 3 accounts for a huge proportion of a business’s GHG impact. When disclosing and addressing these value chain emissions becomes mandatory for large organisations, enterprise business will be faced with a huge challenge. Failure to make satisfactory progress on emissions will expose organisations to a variety of risks, including regulatory action and decreased attractiveness to investors and customers alike.
Tackling scope 3 emissions requires influencing actors in the upstream supply chain – something businesses and their procurement functions cannot achieve without deepening ties to the supply base to promote alignment on goals and reporting, collaboration on projects that improve existing performance, and innovation to drive new solutions.
Organisations who successfully harness Supplier Collaboration and Innovation to make a meaningful difference to their value chain emissions will see their business future-proofed against backlash from consumers, investors, and regulators, and secure competitive first-mover advantage.
To learn more about how to reduce Scope 3 emissions through Supplier Collaboration, visit Vizibl Sustainability
