Spotlight on scope 3 and supply chain decarbonisation

By Rachel Weller

10th Nov, 2021

With COP26 now well underway, the topic of credible climate change – or net zero – commitments is high on the agenda. Decarbonising supply chains will be key to tackling the climate emergency. To date, too many corporate net zero commitments have been too limited in scope and won’t deliver the change needed.

In the quest to reach net zero emissions, it is critical that organisations go beyond their direct operations – the so-called Scope 1 and 2 emissions – and tackle the emissions associated with the creation and use of their products and services – Scope 3 emissions.

Supply chains are typically the most carbon intensive part of businesses’ footprints. Unfortunately, business’ commitments have historically tended to focus on reducing the impact of their direct operations while failing to account for significant emissions in their value chain. Some estimates point to a range of 80% to 97% of organisations’ emissions falling under Scope 3, meaning that Scopes 1 and 2 only capture the very tip of the iceberg. For example, Scope 3 sources are estimated to account for 90% of the average large fashion brand’s total emissions footprint, yet according to non-profit Stand.earth, many brands have failed to develop meaningful targets and decarbonisation strategies targeting Scope 3.

The climate science is clear that reaching net zero by 2050 cannot happen without decarbonising supply chains  – and regulatory, investor and civil society scrutiny is increasing pressure on companies to take action:

• The explosion of ESG data means that investors have more insight into businesses’ emission profiles and can assess the credibility of their pledges and actions
• New and emerging standards and legislation increasingly require disclosure of climate risks and opportunities including where in the value chain they are concentrated. This is already included in the disclosure recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD) which will be mandatory for large UK-registered companies from April 2022. EFRAG, the European Financial Reporting Advisory Group that is developing the EU’s new corporate sustainability reporting standards, further recommends disclosure on engagement with upstream and downstream partners to promote climate mitigation and/or adaptation solutions.
• Mandatory human rights and environmental due diligence legislation – which is expected to be introduced at the EU level from next year – will also increase the visibility of practices in businesses’ supply chains. As a result, value chain climate litigation, where claimants seek to hold companies responsible for acts and omissions in their value chains, is also tipped as a growing trend according to the LSE’s Grantham Institute.
• Efforts are also underway to secure an effective global carbon price that will price in carbon emissions into the cost of goods and services and prevent carbon offshoring, or the ability for firms to evade stronger climate-change obligations by producing and procuring goods from countries with weaker climate regulations.

These pressures on business are likely only to increase. Businesses would therefore be wise to act on decarbonising supply chains now.

Evidence suggests that many of the changes necessary to decarbonise supply chains are readily available. These can include switching to renewable energy and measures to increase energy efficiency – and can often result in cost savings or have only a marginal impact on the cost of goods for consumers.

Then there is the cost of inaction. A lack of focus in this area also means that businesses will lose out when competing for work. For example, the UK government now requires businesses to commit to net zero by 2050 and publish carbon reduction plans as a prerequisite when awarding public contracts.

Many businesses have delayed tackling Scope 3 as it is more complex and beyond their immediate sphere of control. However, inaction is no longer an option and the process needn’t be fraught with complexity. Key steps that businesses should be thinking about include:

1. Visibility – building an understanding of the business’ carbon footprint including through gathering supplier data on emissions.
2. Commitment – set commitments and targets to reduce emissions along the value chain.
3. Alignment – integrate emissions into product design choices and geographic sourcing strategy and set procurement standards.
4. Engagement – educate suppliers on emission reduction importance and programmes.
5. Partnership – help suppliers to fund emission reduction programmes.
6. Collaboration – join collaborative platforms to learn and share best practice, such as the 1.5c Supplier Engagement Guide, recently launched at COP26 and backed by businesses including BT, IKEA and Unilever.
7. Incentivize – align incentives of internal decision makers with emissions targets, and reward and/or prioritise suppliers that create credible plans and drive results.

Sancroft has spent over 20 years ensuring organisations understand their climate risks and working with them to develop actionable strategies. If you would like to know more, please contact Rachel Weller at Rachel.weller@sancroft.com.