Why you should track your Supply Chain Emissions

The supply chain is like the last frontier of emissions accounting. Most companies that track and manage emissions tackle the low-hanging fruit first – emissions from their own operations. Not many are brave enough to venture deep into the supply chain, but those who do find potentially significant rewards in emissions reduction opportunities. 

In this article, we explain why monitoring your supply chain emissions is important and how to go about doing it. 

What are supply chain emissions?

There are three types of emissions – Scope 1, Scope 2, and Scope 3, all defined below. The language and methodology for emissions tracking are quite standardised in carbon accounting, originating from the Greenhouse Gas (GHG) Protocol, so these three categories are universally understood regardless of the wider framework you use to report other ESG aspects. 

Scope 1 – Direct emissions from manufacturing, services, and owned sources, including emissions from fleets and generators and the use of chemicals.

Scope 2 – Emissions from purchased electricity used for internal operations.

Scope 3 – Indirect emissions from upstream and downstream activities.

A company’s total emissions are Scope 1, 2, and 3 combined. Scope 3 is what is referred to as supply chain emissions – emissions distributed along the value chain which can be very localised or hyper-globalised. 

Why is it important to track supply chain emissions?

Companies outsource a great number of activities, resulting in most emissions associated with the production and delivery of goods or services being buried deep within supply chains. It’s convenient to simply forget or dismiss the emissions in supply chains while companies mind their own operational footprint. But the excuse that the supply chain is beyond the operational control of large companies can no longer fly in today’s regulatory environment.

Tracking emissions in the supply chain is necessary to meet these new regulations. It is also necessary for a low-carbon transition. Up to 75% of a company’s total emissions come from the supply chain.¹ Realistically, given these numbers, achieving decarbonisation is impossible without reducing supply chain emissions.

Corporate net-zero ambition must address the elephant in the room: Scope 3 emissions. With more than one-third of the world’s largest listed companies having pledged to achieve net-zero (often by 2050 in line with the Paris Agreement targets).

Many are already laying the groundwork for base lining Scope 3 emissions in an attempt to progressively measure and manage supply chain emissions.² Not to mention, having a solid grasp of your supply chain emissions will open up a world of financing opportunities for climate-conscious investors looking for low-carbon investments. 

Laws and regulations to track emissions in the supply chain

In Germany, where the Supply Chain Due Diligence Act entered into force on the 1 January 2023, companies now face penalties for pollution or human rights violations that occur in their supply chain. The EU has also adopted a directive on corporate sustainability due diligence, targeting environmental and human rights standards in company supply chains. This reflects a trend towards stronger accountability for ESG in general.

Regulations related to emissions disclosures are quickly becoming the norm, too. The UK has made climate transition plans mandatory for listed companies. On top of that, TCFD reporting is also mandatory.

Following in the UK’s footsteps, the US Securities and Exchange Commission (SEC) is deliberating a proposed law to make climate disclosures mandatory, which would require reporting on Scope 3 emissions. Other countries have implemented carbon pricing for companies that produce emissions in excess of the allocated cap. For a carbon tax to work, there must be transparency in the supply chain.

How to track supply chain emissions

Tracking Scope 3 emissions is a detailed process which can get quite technical when you get into it. The GHG Protocol is the predominant resource that you want to refer to, specifically the Corporate Value Chain (Scope 3) Accounting and Reporting Standard (the only internationally recognised standard for supply chain emissions accounting).

Its framework also provides recommendations on working with suppliers to achieve emissions reduction goals. This can be supplemented with the Scope 3 Calculation Guidance. It is a technical document that details the following: 

• The calculation methods for taking an inventory of your Scope 3 emissions, including defining the boundaries for 15 categories of Scope 3 emissions.
• How to select the appropriate calculation method.
• Examples of each calculation method.

A full Scope 3 assessment will entail engaging with your supply chain to obtain the relevant data on their emissions. This process can be complex for companies with multiple suppliers and tiers of suppliers. We recommend working with a consultant, although the resources above are suitable for in-house carbon accounting, too. 

At the risk of glazing over the details, the basic steps to tracking supply chain emissions are:

1. Understand the data and calculation methods you need, and set up a system for data collection.
2. Determine ownership of the project i.e. who is in charge of collecting, updating, and auditing data, engaging with suppliers and doing the calculations.
3. Communicate with suppliers about your intentions and what they can expect from your carbon accounting plans.
4. Use the GHG Protocol methodology to take an inventory of baseline Scope 3 emissions.
5. Get an external auditor to verify the results (optional but recommended).
6. Incorporate the results into your climate transition plans, setting targets to achieve your carbon reduction goals.

Expect steps #1 and #3 above to consume most of your time and energy, as these are tedious processes involving a lot of back-and-forth communication and numbers crunching. This is where the bulk of Scope 3 measurement and monitoring takes place. If you want to take ownership of supply chain emissions, you should have a firm handle on the data sources as well as a clear engagement strategy that paves the way for further cooperation with your suppliers. Tracking supply chain emissions is the first step to reducing your carbon footprint and mitigating climate impacts. Make sure you get it right by following the steps above and getting help where needed.

How we help you

• We guide you to conduct supply chain due diligence by contacting your suppliers and simplifying the collection of relevant data internally and along the whole supply chain.
• We receive information from your suppliers without jeopardising business-critical information about their supply chain from exposure, only showing one level up and one level down.
• We facilitate data exchange with suppliers and ensure that necessary and accurate information from the supply chain arrives with minimal effort.
• We conduct risk assessments of your supply chain and set up a grievance mechanism. 
• We provide a centralised platform to manage all your data, pulling data from enterprise software such as ERP, HRM, EMS, etc.
• We offer insights powered by data analytics, enhancing your understanding of your supply chain, ESG performance, and reporting strength.
• We automate follow-ups to data sources, reminder emails and calculations and free up more time for you to do other things.

¹ https://www.wri.org/update/trends-show-companies-are-ready-scope-3-reporting-us-climate-disclosure-rule

² https://zerotracker.net/insights/pr-net-zero-stocktake-2022