On the heels of the 2021 United Nations Climate Change Conference (COP26), many businesses are eager to demonstrate their efforts to combat climate change by making net-zero commitments. To validate these efforts, they are working with groups like the Science-Based Targets initiative (SBTi), which issued a new Net-Zero Standard, effective January 2022. Around 1,000 companies have already worked with SBTi to establish credible, science-based targets for tracking their respective emissions reductions.
So what is net-zero?
The concept of net-zero is when a business, country, or other entity removes an amount of greenhouse gases (GHGs) from the atmosphere, equivalent to the GHGs that it emits, essentially canceling out its contribution to climate change. Becoming net-zero involves understanding an organization’s emissions across three categories:
- Scope 1: direct emissions from an organization’s operations (e.g., burning fossil fuels)
- Scope 2: emissions that the organization is indirectly responsible for (e.g., purchased electricity)
- Scope 3: emissions related to the organization’s activities but not owned by the organization (e.g., from the organization’s supply chain)
Importantly, companies cannot simply “offset” their way to net-zero. Under today’s leading net-zero frameworks, offsets play a minimal role compared with holistic strategies including efficiency and direct, long-term renewable energy procurement.
Challenges in scope 3
Scope 1 and 2 GHG emissions are measurable and addressable by most organizations using well understood data and methods that utilize primary data from company fuel consumption and electricity purchases.
As the US EPA explains, “the scope 3 emissions for one organization are the scope 1 and 2 emissions of another organization.” These cumulative emissions are substantial: “supply chain emissions are on average 11.4 times higher than operational emissions,” corresponding to around 92% of an organization’s total GHG footprint.
Nonetheless, activities in the supply chain are often blind spots for organizations. A 2021 Survey of Chief Procurement Officers (CPOs) found that “around 70% of CPOs felt that they had good visibility on the risks that existed in their direct (tier 1) suppliers. Yet, only 15% reported having visibility into tier 2 or beyond,” i.e., their suppliers’ suppliers. Besides emissions, risks in the indirect supply chain include interrelated social and environmental issues, such as illegal deforestation in the Amazon.
When you need to measure all scopes
- If your GHG ambition includes setting an official Science-Based Target and your Scope 3 emissions are more than 40% of your total emissions, your organization must set a Scope 3 reduction target.
- Your scope 3 reduction target must cover between 67% and 90% of your total Scope 3 emissions (depending on whether your target is long-term or short-term)
- To set a Scope 3 target, you will first need to establish a Scope 3 GHG baseline.
- For companies in pharma, biotech, manufacturing, and automotive, there are thousands of suppliers, parts, raw materials, shipments, and other business activities that get pulled into the analysis.
- Achieving a Scope 3 baseline that you can actually track requires new data management approaches that are not likely to exist within traditional financial accounting or ERP systems.
How to measure Scope 3 emissions for a net-zero goal
Historically, companies have ballparked Scope 3 emissions using online calculators or spreadsheets from their consultants. Both of these methods rely on spend or volume data at a purchasing category level to create rough estimates of your Scope 3 GHG baseline. The problem with the old approach is that approximation tools do not have the granularity required to detect changes in your Scope 3 emissions over time. Measuring improvements not tied to spend or volume is critical to achieving a Scope 3 GHG target.
Using broad financial or activity data, the only way your absolute Scope 3 emissions go down is if your spend or activity goes down. Will your organization actually buy less of a particular raw material? Will the GHG emissions associated with that material change over time? How do differences among supplier production processes impact the GHG footprint of a particular material or business activity? What are our suppliers doing in their operations to support reductions in our footprint? These are all questions you will need to answer but you may not have the data to set a net-zero ambition with confidence.
Why supply chain mapping is more critical than ever
Most organizations lack the sub-tier supply chain visibility needed to track Scope 3 emissions performance over time based on specific raw materials, volumes, origins, and transformation steps. This data needs to be obtained through supplier engagement. However, most ERPs and procurement databases only contain contact information and purchasing data for Tier 1 (direct) suppliers. In order to engage all of the suppliers who impact your Scope 3 footprint, you must first know who those suppliers are and what data to collect.
End-to-end supply chain mapping is a critical first step. For mid-sized companies with a simple bill of materials, it may be possible to engage suppliers directly and gather the information required. Data may include raw material volumes and origins, third party certifications which impact GHG footprint (e.g., farm practices for agricultural inputs), and the type of energy used by upstream manufacturers and processors.
For multinationals with complex supply chains, Third Partners leverages a long-term strategic partnership with Sourcemap. Together, we give companies the advisory and technology tools they need to set and monitor net-zero GHG goals with confidence.
Scope 3 GHG measurement, goal-setting, and performance monitoring is typically delivered as an extension of other supply chain mapping and traceability functions. These may include business continuity planning, raw material sourcing risk reduction, brand protection, and compliance with various regulations. U.S. CBP, the EU Deforestation Law and other emerging regulations provide organizations with a powerful compliance mandate for tracing and disclosing raw material origins. The same data used for trade compliance can be applied to Scope 3 GHG measurement.
When organizations have end-to-end supply chain visibility, they are more prepared to measure performance on Scope 3 emissions targets in areas such as purchased goods and services, upstream transportation, franchises and investments.
How we can help
Regardless of the position of your organization within your customers’ value chain, Third Partners can work with you to develop an efficient data management and GHG reporting strategy for your net-zero ambition. Not sure of your ambition? We can help with that, too.
- Get help building internal GHG data management processes
- Identify data gaps and sources of external intelligence
- Secure leadership team buy-in
- Set a science-based GHG target that is both competitive and feasible
- Track and report your progress according to established frameworks including SBTi, GHG Protocol, GRI, and CDP
If the planning process reveals that you have a complex supply chain and your net-zero goals hinge upon reducing Scope 3 Category 1 (purchased goods and services) we’ll help you deploy Sourcemap’s world-leading supply chain mapping and traceability technology to create the end-to-end data visibility you need to succeed.
Contact us for a free consultation.