The Emissions Omission

Achieving net-zero should account for supply chain emissions too

Since the last UN Climate Change Conference there has been a noticeable amplification of rhetoric and action, by governments, companies, and other organisations, to reduce their carbon emissions to achieve net-zero by 2050.

Some have more ambitious targets. For example, companies as different as Amazon, Mercedes-Benz and Unilever are among the 376 organisations (at the time of writing) that are signatories to The Climate Pledge, which aims for net-zero by 2040.

As the targets come closer, and the dangers of climate change become more evident, a great deal more attention is being given to supply chains, which for many organisations have been effectively omitted from their thinking and actions. Until now.

Supply or value chain emissions (scope 3 emissions) include all the indirect emissions of an organisation that are both upstream and downstream of its operations.

For many organisations, scope 3 emissions may represent the majority of the organisation’s emissions. For example, it has been estimated that in the oil and gas industry, scope 3 emissions are more than six times greater than an organisation’s scope 1 and 2 emissions. And even though an organisation does not own or control the other entities, there is still an opportunity to reduce emissions by influencing their activities and by choosing to contract with vendors that have clear emission reduction plans.

Interestingly, while one may intuitively think hunting for lower emissions in a supply chain will dramatically increase costs, the evidence seems to suggest this is not the case. According to research from the World Economic Forum in 2021, net-zero supply chains would only increase end-consumer costs by as little as 1-4% in the medium term.

Taking an even bigger picture view, if we regard emissions as waste, we know that competitive markets are designed to drive inefficiency out. The more emissions are seen as a cost, the greater the effort, investment and competition to operate without them. Capitalism can be a beautiful thing. But where to start?

Visibility is vital

We can’t assess and act on emissions in our supply chain if we don’t have actionable intelligence on them. So, the first thing we need is reliable data and technology offers great potential to help in this regard. A digital representation of supply chains is now possible.

The Internet of Things (IoT) and blockchain are the two key technologies that will enable a digital supply chain to report data in a timely way. IoT technologies help automate supply chain management. For example, when used in retail stores they efficiently aid inventory management by tracking stock in real-time, monitoring on-shelf availability and allowing for automated price label updates and stock alerts.

Similarly, blockchain significantly improves the transparency and traceability of emissions, helping organisations access more accurate, reliable, and standardised data. Utilising a networked and decentralised approach, blockchain allows for tracking and reporting of scope 3 emissions along the entire value chain, including suppliers, manufacturers, distributors, and consumers.

Thankfully, data and analytics technologies are evolving faster than ever, and they are becoming easier to adopt for organisations and end users. Supply chain big data analytics along with blockchain and IoT markets are growing, with the latter two, over the next five years, at a CAGR of 17% and 40% respectively.

Once data is visible it can be leveraged

Once data can be seen and understood within a digital supply chain, it can enable an organisation to create competitive advantages. Advantages that not only increase operational efficiencies and improve customer service but enable action to reduce emissions and achieve a net-zero supply chain.

A digital supply chain is often associated with the concept of a digital twin, a complete digital model of the physical supply chain factors and data. This digital capability allows organisations to move from a reactive to a predictive position by modelling and simulating different supply and demand scenarios, as well as reflecting the financial implications of increased operational disruptions and costs. Digital twins, or an approximation of a full twin, can also be leveraged to manage risk and build resilience. And, most important for this discussion, they can model emission reductions.

There is no doubt developing such a capability is a challenge. Yet there is also an inevitability about the need to do it. Organisations need to be able to see beyond the first tier of suppliers, to see what we call the n-tier, which is simply all the other suppliers beyond the first layer. It is hard because supply chain data is fragmented, sitting across multiple systems, different geographies, and even several business groups within a company.

Interestingly, recent studies show that the majority of organisations are increasing their investments in the supply chain with technology being the major spend. And, more than half of those organisations also invested in the sustainability of the supply chain. While investments are needed, however, it is critical for organisations to ensure they have a strategic alignment with their suppliers to set realistic and achievable targets. That especially means considering the readiness and capability of suppliers to set and achieve realistic targets. Ideally, this is done with more carrot and less stick.

The strategic alignment and collaboration with suppliers will also assist in being able to effectively map the supply chain, to the level of the n-tier, and understand what data is captured along the chain.

This mapping exercise will also help to identify which providers might lack essential data gathering and sharing capabilities, and pinpoint where cost-effective solutions need to be applied to close the gap.

Collaboration is the best place to start

As scope 3 emissions involve parties that organisations don’t have direct control over, proactive engagement as part of the strategic alignment, helps to create the accountability and transparency needed to achieve end-to-end visibility and a true net zero value chain.

So, at a minimum, organisations ought to start planning for developing the capability to report on scope 3 emissions. Already their status is becoming more important in investment decisions, especially in the resources sector, and there are advocates, like Australia Institute, that seek to have scope 3 reporting legislated. More than that though, the potential upside from being ahead of competitors on the emissions frontier is enormous, not to mention the resilience and predictive insights a digital supply chain also brings.