In the past year, we’ve seen a surge in the popularity of carbon neutrality announcements. Companies and governments have been lining up to declare carbon neutrality, and there is increased focus on decarbonization of the economy. However, because there is no common definition of “carbon neutrality” and companies have a variety of different perceptions about it, the approaches for how to reach the goal of carbon neutrality vary greatly.
Companies differ a lot in their ambitions, too, even though at first it might seem that their claims are straightforward or similar. The reality is that businesses interpret the scope of their emissions differently. Whereas some companies follow a holistic approach, considering the entire value chain, others only look at emissions that are under their direct control and potentially neglect a substantial portion of their carbon footprint.
A holistic assessment of the entire value chain contributes to a company’s credibility when it comes to announcing carbon neutrality. Setting a Science Based Target (SBT) gives businesses guidance on their path to carbon neutrality and helps define a comprehensive strategy for carbon neutrality. It is clear that CO2 will become an important purchasing criterion in the near future, so there is a rising demand for accountability in the supply chain.
Where Companies Get Carbon Neutrality Wrong
The recent World Economic Forum in Davos, Switzerland, is just another example of the intense pressure for companies to aim for carbon neutrality by 2050. Investors are increasingly demanding that corporations take action on the climate. Large companies across sectors have started announcing that they will reach their carbon neutrality targets by a certain date. However, because we don’t have a common or standardized definition of what carbon neutrality means, we see a great variety in the quality and accuracy of these announcements.
First, organizations tend to fail in their approach because of a lack of guidance. That can lead to criticism from the public, environmental groups and other nongovernmental organizations (NGOs) for making unreliable or untrustworthy commitments. These companies often make announcements about emissions reductions that only include activities under their direct control (scope 1 & 2) while neglecting huge impacts in their value chains, such as the emissions from their suppliers or from the use and disposal of their products (scope 3). Often, companies make last-minute announcements and simply try to offset a lot of their scope 1 and scope 2 emissions without further reduction targets, and in doing so, cross the line between serious commitments to something akin to greenwashing.
Science Based Targets as the Cornerstone of a Holistic Decarbonization Strategy
A serious and holistic decarbonization strategy must include all emission sources that are associated with the scope of a business’s activities, the product or the service they provide. First, it must include the emission sources of the entire value chain (scope 1, 2 and 3). Second, it must include realistic timelines and reduction targets. The best place to begin is to set a Science Based Target.
The Science Based Targets initiative (SBTi) is a partnership between the Carbon Disclosure Project (CDP), United Nations Global Compact, World Resources Institute (WRI) and World Wildlife Fund (WWF), and gives guidance on how an emissions-reduction target can be set so that it is in line with the 1.5°C (2.7°F) target as defined in the Paris Agreement (1.5°C above preindustrial levels). Setting a robust SBT will help align an organization’s reduction and emission avoidance efforts with climate science (prior to offsetting) to achieve carbon neutrality. It therefore gives companies a framework in which to operate and sets the major milestone on the path to carbon neutrality.
Decarbonizing the Supply Chain
Including the entire value chain in a decarbonization strategy should then be a top priority. In most sectors, the emissions coming from the value chain (scope 3) make up the biggest chunk of a corporation’s carbon footprint. Around 40% of greenhouse gas emissions normally come from the purchases a company makes and during the use of the products it sells, according to the 2017/18 CDP Supply Chain Report. So, excluding value chain emissions from a business’s efforts means that it is neglecting a huge portion of its footprint, barring the company from making serious decarbonization claims.
Setting a decarbonization target for scope 1 and 2 emissions is comparably easy because those emissions are usually under the business’s direct control and tend to be relatively easy to calculate. The real challenge comes when accounting for scope 3 emissions. Screening scope 3 emissions can help determine which category makes up the majority of the scope 3 emissions. Usually this is the case for category 3.1 (purchased goods and services), hence the supply chain.
This is where it gets tricky: Properly assessing supply chain emissions proves challenging. A recent WWF paper explains that there are many challenges when it comes to accounting and reducing these emissions. Here are a few:
– Accounting challenge: How to calculate scope 3.1 emissions and create the transparency required for scope 3 management.
– Impact measurement challenge: How to calculate the beneﬁts of supply chain action, especially if scope 3 emissions are only roughly approximated with secondary data.
– Action challenge: How to ﬁnd the most eﬀective approach to reduce emissions in the supply chain.
These challenges are accompanied by a lack of transparency of supplier activity and emission data, a lack of resources and know-how (both for the supplier and the OEM) to manage those emissions, a lack of benefits for suppliers to communicate the results and a lack of ability to influence third parties along the value chain.
We could also include here a certain lack of trust between supplier and customer. There is a fear of revealing process-specific and business-relevant information, of sharing know-how with a customer and potentially becoming vulnerable in future negotiations. The reservations are further driven by the fact that suppliers do not know their emissions situation when they are benchmarked against their competitors.
But this does not always have to be the case. Companies can build trust with their suppliers through collaborative action toward achieving the common goal of decarbonization. One example of an effective approach in reducing supply chain emissions is the effort taken by Audi and its wheel rim manufacturer Cromodora to establish a long-term collaboration. By working together, a company shares risk, and the supplier is able to set up a profitable, sustainable production line, reducing both its own emissions and ultimately the emissions in its supply chain.
The first step therefore always should be to integrate suppliers in the process, jointly developing focus areas and CO2 reduction mechanisms. This is especially crucial as the direct control and the expertise of the supply chain lies in a supplier’s hands and not in the OEM’s.
Giving CO2 a Price Tag: The Demand for Emissions Accountability in the Supply Chain
As the WWF stated, there still is a lack of knowledge and transparency on how to account for the emissions in the supply chain. Currently, the most commonly used framework to assess emissions from a value chain is the GHG protocol (in particular the Technical Guidance for Calculating Scope 3 Emissions, 2013). Looking at category 3.1 (purchased goods and services), there are different approaches that range from using a spend-based method that provides generic results to the methods that use supplier-specific information (known as the supplier-specific or hybrid method). Using this framework is typically a good way to start. The right method for a company depends on multiple factors—such as a business’s level of know-how, its supplier’s know-how and its product portfolio—and requires specific evaluation.
As we see an increase in the awareness for sustainable practices in industry, sustainability requests from investors (e.g., BlackRock) and the suggestion from, for example, Volkswagen’s chairman, Herbert Diess, who said that “100 €/ton CO2 is not outrageous,” we can expect that regulators will, at some point in the near future, give CO2 a price tag. It will clearly become a purchasing criterion. Along with this inevitable change will come the need for transparency in terms of the emissions inventory and the need for reliable emission data. It therefore seems only logical that there will be a higher focus on supplier-specific, primary emission data.
Life Cycle Assessment as a Method to Get Supplier-specific Emission Data
Life Cycle Assessment (LCA) is a tool that has the potential to address the accounting challenge and can help companies better analyze the impacts the supply chain is having on their entire carbon footprint. LCA provides the possibility of delivering different levels of granularity, depending on a company’s focus. It can include data from the production of raw materials all the way up until the purchased product is delivered, thereby reflecting the entire supply chain (known as “cradle-to-gate,” a supplier-specific method that adheres to the GHG protocol). If a company’s focus is a reduced approach that looks only at direct suppliers, primary “gate-to-gate” LCA data can be collected and complemented by data from life-cycle assessment databases. Sphera’s GaBi database, for example, offers a huge portfolio of secondary data that can help companies get their supply chain data right.
Using LCA in the right way will get the customers the supplier-specific emission data and transparency they need without disclosing the supplier’s entire process know-how. By including a third party to conduct the data collection and calculation of the “cradle-to-gate” or “gate-to-gate” emission inventory, LCA can also help reduce existing reservations. So, it can be a solid tool for addressing the accounting challenge described before and can help identify the impact the supply chain has on a company’s overall carbon footprint.
Partnering on Decarbonization
Sphera helps companies to develop a serious decarbonization strategy, set a Science Based Target and choose reliable offsetting approaches (see “7 Keys to Offsetting Your Carbon Emissions”) to achieve long-term carbon neutrality. With our SoFi Software, we deliver a tool to collect emissions data and track it over time, allowing transparency about where companies are along their sustainability journey.
When it comes to sustainability in the supply chain, our consultants help companies screen their scope 3 emissions and identify hotspots for taking immediate action. We help develop approaches for engaging with suppliers. As a third party, we can help both customers and suppliers to extract reliable emissions data from the supply chain while, at the same time, allowing suppliers to protect their individual know-how. Our GaBi Software enables companies to carry out Life Cycle Assessments for purchased goods and enables them to feed their decarbonization strategy with reliable, high-quality supply chain data.
Stefan Premer is a consultant at Sphera.