If your title includes Sustainability or Operations, you are likely under increasing pressure to report on and reduce your company’s carbon footprint. You’re probably well-acquainted with managing direct emissions (Scope 1) and emissions from purchased electricity (Scope 2). However, a significant portion of your environmental impact lies in Scope 3 emissions—indirect emissions in the value chain. These often account for more than 70% of a business’s total carbon footprint. Addressing these emissions is not just an environmental imperative but a strategic business decision.
Why Tackle Scope 3 Emissions
Corporate Scope 3 reporting will not be voluntary forever; the push for mandatory disclosure is intensifying. Organizations like the International Sustainability Standards Board (ISSB) and the US Securities and Exchange Commission are drafting recommendations for Scope 3 emissions disclosure. A PwC survey revealed that over a third of investors (representing $14 trillion in assets under management) prioritize reducing Scope 3 emissions.
With decades of combined experience in corporate sustainability, our team can assure you that addressing Scope 3 NOW will turn this potential liability into a future asset. Reducing these emissions early can drive efficient financial planning and de-risk your business from the effects of climate change. Neglecting them can lead to increased regulatory risks, brand damage, and missed financial opportunities.
Identifying Common Scope 3 Challenges
Most businesses find that the majority of their GHG emissions, and thus cost reduction opportunities, lie beyond their direct operations. Consider, for example, the humble T-shirt. Its Scope 3 emissions come from an array of upstream sources:
Purchased Goods and Services: Emissions from producing cotton or other materials, including growing the fiber, processing it into yarn or fabric, and dyeing it. Cotton is a water-intensive crop, and pesticides and fertilizers significantly contribute to greenhouse gas emissions and costs. Deforestation can sometimes occur when making way for cotton farming.
Upstream Transportation and Distribution: Indirect Scope 3 emissions result from transporting raw materials to the factory, fabric to the garment manufacturer, and the finished t-shirt to stores, sometimes across different countries. Turning raw fibers into usable fabric involves multiple stages – spinning, weaving, knitting and dyeing, each process individually energy-intensive.
Additionally, there are downstream emissions from care and end-of-life management. Scope 3 emissions are inherently cost centers for the company.
Cost Savings & ROI: Supply Chain Optimization
Reduced Transportation Expenses: Analyzing upstream and downstream transportation can reveal inefficiencies in routes, logistics, or modes of transport. Shifting to more fuel-efficient options (e.g., electric vehicles, optimized delivery routes) or consolidating shipments can lead to significant cost savings on fuel.
Lower Material Costs: Optimizing material sourcing and production processes minimizes waste. This includes using less material per product, utilizing recycled materials, and reducing scraps during manufacturing.
Energy Efficiency Collaboration: Partnering with suppliers to implement energy-saving technologies and optimize production processes reduces energy use and costs for both parties. For example, Walmart's collaboration with suppliers in China reduced factory energy consumption by 32.4%.
Revenue Growth from Enhanced Brand Reputation: Companies committed to reducing Scope 3 emissions attract and retain eco-conscious customers willing to pay a premium. Patagonia's sales quadrupled in the 2010’s surpassing $1 Billion annually.
Risk Mitigation: A Multi-Faceted Approach
Regulatory Risk Mitigation: As regulations around greenhouse gas emissions become stricter, companies with a strong track record of addressing Scope 3 emissions are better positioned to comply. This means avoiding potential fines, additional compliance costs, or limitations on operations due to non-compliance.
Improved Investor Relations and Financing: ESG (Environmental, Social, and Governance) investing is growing rapidly. A 2022 Global Sustainable Investment Alliance report found that sustainable investments reached $30.3 trillion globally. Companies with a strong sustainability performance are more attractive to ESG-focused investors and are likely to continue accessing capital.
Supply Chain Resilience to Climate Risks: Lowering emissions reduces exposure to climate-related disruptions, such as extreme weather events and resource scarcity. For example, a company sourcing material from a drought-prone region will improve its supply chain reliability by switching to a diverse supplier portfolio from less vulnerable regions and collaborating with them to reduce emissions.
Let’s bring back the humble T-shirt and make it Scope 3 efficient. We start by optimizing material sourcing with organic or recycled cotton to cut water usage and greenhouse gas emissions. Next, we implement energy-efficient technologies in fabric production, such as renewable energy and upgraded machinery, to lower energy consumption and costs. Finally, we consolidate transportation routes and switch to sustainable logistics to reduce fuel expenses and emissions. These steps save production costs, boost brand reputation, and enhance supply chain resilience, offering significant long-term benefits. And voila, you now have your favorite T-shirt, green across the value chain, and a fortified, resilient company.
Challenges In Addressing Scope 3 Emissions
If you've begun to tackle the Scope 3 challenge, you're likely encountering one or more of the following issues:
Data Collection and Accuracy: Obtaining high-quality data across the supply chain is difficult, especially for smaller businesses. Poor data quality and the lack of standardized methodologies complicate accurate reporting. Stay tuned for our upcoming blog post on effectively tackling these data management challenges.
Resource Constraints: Measuring and reducing Scope 3 emissions requires significant financial and human resources. Integrating these initiatives into existing operations can also be complex and resource intensive.
Supplier Engagement: Engaging suppliers to adopt sustainable practices involves overcoming confidentiality concerns and varying levels of commitment to sustainability. We offer a modular workshop to help you engage your suppliers and drive meaningful change. Look out for our detailed blog post on this topic soon.
The More You Drag, The More Expensive It Gets
No matter where you are in addressing Scope 3 emissions, ESGineering can help. Schedule a free assessment with us today. We find sustainability initiatives are most successful when companies have the right resources to address them.
Addressing Scope 3 emissions proactively can unlock significant monetary value and business resilience. The Scope 3 challenge is massive, but embracing it is a wise investment in future-proofing your business. We will leave you with some timely words by Kevin Eckerle, Director – ESG Operations and Performance, Bayer
"This universe of scope 3 accounting and scope 3 calculations is going only in one direction. You can either run into the sustainability future or be dragged. The rewards of the former far exceed (those of) the latter. The more you drag, the more expensive it gets".