With the recent news that the ISSB has voted unanimously to require company disclosures on Scope 1 & 2 and Scope 3 greenhouse gas emissions, the dial has turned another notch, adding to the growing sense of the heightened expectations of regulators, standard-setters, investors and other stakeholders. Companies from diverse sectors and regions of the world are responding to this changing landscape by intensifying their efforts to accelerate the reduction of their Scope 3 emissions, and in particular their suppliers’ Scope 1 and 2 emissions.
A lot has been written and shared about best practices in engaging suppliers on their sustainability performance and carbon accounting, but the fact that companies are still struggling to make progress in this area – and consider Scope 3 emissions-reduction to be the biggest headache – indicates that there are hidden or stubborn barriers to progress still lurking and, potentially, golden nuggets of learning waiting to be unearthed.
Let’s start with a brief review of what is most frequently agreed on as best practice.
Tips to Engage Suppliers and Improve Sustainability Reporting
- Identify and engage a limited number of suppliers that account for the greatest percentage of company spend
- Fully integrate sustainability and carbon requirements into procurement processes and business discussions, and ensure formal top management commitment
- Engage suppliers with clear expectations not just to provide data on Scope 1 and 2 emissions, but to set timed emission reduction targets
- Encourage suppliers to sign up to the Science Based Targets initiative to ensure their data is verified
- Actively support suppliers to build their capacity to produce accurate climate accounting reports and reach set goals
- Join relevant industry coalitions and initiatives to leverage collective influence and pool resources and efforts in a streamlined way across the supply chain
To be clear, none of this is a walk in the park. It can take years to successfully obtain top management support for ambitious targets and programs of this magnitude, not to mention the effort and skill required to build internal consensus and collaboration across relevant functions such as business lines, legal, procurement and sustainability. Making the business case and obtaining the resources to consistently make progress can also be a major challenge, as company priorities shift in line with volatile market conditions.
However, if the foundations mentioned above are pretty much in place to support a robust supplier engagement plan, let’s look at the key barriers and opportunities that are coming into focus as a result of companies’ ‘learning-by-doing’ journey so far.
Hidden and Stubborn Barriers to Reporting on Scope 3
Conflicting Purchasing Practices
One of the biggest systemic challenges to improving suppliers’ sustainability performance, including carbon emission reduction, is the sometimes erratic behavior of companies who make strong sustainability requirements of their suppliers – often resulting in increased costs for the supplier – while at the same time imposing challenging business requirements such as lower prices and tighter lead times for product deliveries. This is an example of where a company’s drive towards ever-greater profit and revenues can fail to internalize the costs of externalities in its supply chain.
Possible solutions can include identifying this as a material issue and evaluating options with top management to internalize costs. For example, if a retail brand typically maintains a 40% profit margin and suppliers or contract manufacturers have a 2-5% profit margin, the brand could decide to pay a higher price in return for the supplier’s commitment to reach more ambitious carbon emission reductions or a living wage for its employees.
A Focus on Normalized vs. Absolute Emission Reductions
It can be tempting for companies to set emission targets that are normalized to their revenues or product sales so that they can feel good about making reductions without needing to limit their business growth. But clearly, if the goal is to reduce the actual green-house gas emissions that contribute to climate change, the focus must shift to absolute emissions targets. This raises the bar in terms of both effort and investment required by the company to reach the target.
There’s no doubt that companies have to go through a learning process to build up their skill and capacity to identify where and how they can reduce their emissions across all scopes, but the sooner meaningful targets are set for reducing absolute emissions, the greater ‘carbon fitness’ the company will achieve as it boosts its corporate will power and ability for innovation resulting in greater stamina, strength, and resilience.
Unintelligible, Siloed Data
Many companies are still struggling with fragmented data sets that are rarely translated into a coherent big picture that enables decision-makers in relevant functions to understand what is really going on and make informed choices. Using a technology platform that enables managers to regularly consult updated dashboards showing progress on emission-reduction objectives can provide the clarity that is needed to see where there are sticking points or bottle necks.
For example, if 70% of suppliers in the program scope have committed to provide their Scope 1 & 2 data and set emission reduction targets within 12 months but only 10% of them have done so within 8 months, the sooner this is flagged in a dashboard focusing on the most material data, the better.
Limited Scope of Industry Coalitions
While some industries have made significant progress in developing a common framework and collaborative processes to address sustainability challenges in the supply chain, even the more advanced sector coalitions can have trouble moving the needle on emission reductions and other desirable social and environmental outcomes.
One of the reasons for this is that certification programs and related audits tend to focus on enhancing management processes that yield only incremental improvements. These coalitions could make much greater progress by agreeing on an industry roadmap laying out clear targets for emissions reductions and other desired outcomes on material issues.
Progress could be further enhanced by establishing a common platform for collection of key data across the supply chain that would enable suppliers to provide sustainability data and information once in a given reporting period to serve all their customers’ needs, eliminating the current situation whereby suppliers have to reply to multiple similar-but-slightly-different customer questionnaires.
But what about the hidden opportunities for greater positive impact? Three stand out as particularly compelling.
Opportunities to Accelerate Scope 3 GHG Emissions Reductions
1. Materiality Mapping to Identify Hotspots
While it can be tempting to follow the imperative of management and process efficiencies, for example engaging a handful of key suppliers to cover 80% of spend, companies are increasingly realizing that this is not necessarily where the real impact is in terms of emissions. A more diligent and potentially fruitful approach is to evaluate which activities in the supply chain are the biggest hotspots with the highest impact.
For example, engaging a smaller supplier using chemicals in their manufacturing process that emit high quantities of carbon emissions might lead to a bigger overall reduction in emissions than engaging a primary supplier whose operations are relatively energy efficient.
2. Establishing Innovation Partnerships With Suppliers
Some companies are taking the (double) materiality mindset even further and setting themselves emission-reduction targets to be achieved in partnership with suppliers.
For example, P&G’s goal is to obtain 50% of their innovations from their supply chain. In practice, this might mean looking into the footprint of a particular product, such as household detergents, and discovering that 90% of the product footprint comes from heating the water in the washing machine. In this case, collaboration with the supplier could focus on working towards a good result (clean clothes) using water at room temperature.
3. Using More Carrot Than Stick
Companies who have been at this for a while are increasingly reporting better results in their supply chain programs from developing deeper partnerships with suppliers that generate high degrees of trust. While this seems like common sense if we think about how human relationships generally work, it can often be overlooked in a business context.
A simple step that can be taken is for companies to sit down with suppliers who are ready for this step (with relevant decision-makers in the room) and discuss what each party values and how collaboration could result in a win-win for everyone and the planet. This approach also holds the most promise for being able to engage suppliers in more distant tiers of the supply chain.
If you would like to discuss any Scope 3 or carbon accounting challenges that are on your mind, contact us today to speak to a FigBytes team member.