Analyst Insight: A new report from the Intergovernmental Panel on Climate Change (IPCC) warns that there’s no more time to waste in preventing irreversible climate breakdown. 

As one of the biggest perpetrators of global emissions, supply chains face intense carbon regulation and cost shocks. Nevertheless, there are some clear ways that they can identify and reduce their carbon footprint.

For businesses operating complex supply chains, the name of the game is profit, efficiency and resilience. That’s why the new report from UN climate scientists should be a wakeup call for all purchasers or suppliers who have yet to integrate climate into their business strategies. For these laggards, it’s now or never to reevaluate carbon risk and confront emissions across industrial supply chains. Only in this way can they protect the bottom line, remain competitive and build a sustainable economy.

The UN IPCC report reveals that the world is likely to miss its most important climate target. Without immediate coordinated global efforts, temperature rise could irreversibly exceed 1.5 degrees Celsius (2.7 degrees Fahrenheit) above pre-industrial temperatures, and cause permanent damage to economies, nature and livelihoods.

Businesses must keep their foot on the pedal to stay as close to 1.5°C as possible. Compared with 2°C, a 1.5°C world is more economically stable; supply chains are less susceptible to extreme weather risks; workforces are less exposed to extreme heat, drought and floods, and company operations face fewer dramatic water supply issues.

To get there, every business needs to halve greenhouse gas (GHG) emissions by 2030, and aim for net-zero emissions by 2050, across all operations and supply chains.

The risks of inaction go beyond the direct impacts of global temperature rise. Businesses need to prepare their supply chains for growing carbon regulation. Across major economies, mandated carbon reporting and pricing is already in place or promised. Meanwhile, regulation is set to intensify, as policymakers and legislators seek to progress faster against 1.5°C-aligned targets. The most carbon-intensive trade flows will be the hardest hit in these efforts, from commodities to logistics to industrial manufacturing, which account for well over half of the world’s emissions.

Regulations starting in starting in 2023 include:

• January: All ships are now subject to the International Maritime Organization’s new reporting rules, including rolling out Carbon Intensity Indicator ratings for ships under new reporting rules
• April-December: The U.S. Securities and Exchange Commission (SEC) will introduce new climate disclosure requirements, including for supply chains.
• October: The EU’s Carbon Border Adjustment Mechanism (CBAM)[LK1]  will introduce a reporting rule and start preparing a carbon tariff on imports of high-carbon commodities produced outside the EU.

Why are we missing the 1.5°C limit, despite more than a third of the biggest companies committing to net zero and a multitude of existing solutions, from scaling up renewables to pulling carbon from the atmosphere and transforming transportation, environmental and agricultural practices? 

The issue lies with a lack of awareness. To know where to begin in their decarbonization journey, businesses need to see exactly how much they’re emitting across their supply chains, and where those emissions lie. But most can neither quantify nor track them.

In turn, this means they can’t respond to requests from regulators, customers and financiers for verifiable emissions data and reductions — requests that will only increase with climate science’s latest warning. 

Carbon accounting — the measurement of company or product’s GHG emissions —has been around for 20 years. A record number of companies are measuring and reporting their emissions. Yet, a staggering 90% are doing it incorrectly.

As investors call for boardroom and C-suite accountability on climate risk and prioritize resilience in the face of market shocks, carbon accounting demands the same rigor as financial accounting. Mistakes can hide carbon hotspots or lead to unintended greenwashing. Where carbon data influences procurement decisions, the reported average error rate of 30-40% can cost business.
Inaccurate estimates could lead to wildly over-reporting or under-reporting the true carbon impact. For example, one metric ton of aluminum can range between three and 20 tons of carbon dioxide equivalent (CO₂e).

Businesses struggle with accurate carbon measurement for four common reasons:

• Untraceable supply chains. Companies lack visibility of upstream supply chain provenance or downstream customer activities. How can you measure the emissions of your supplier’s supplier if you don’t know who or where they are?
• Reliance on averages. Companies tend to use more easily available broad-based averages and assumptions to estimate their GHG inventory, rather than asset-level emissions factors. This makes it impossible to properly compare suppliers and assets.
• The supplier stumbling block. Companies often leave supply chains out of their emissions calculations due to difficulties in sourcing supplier data. They have reported supplier response rates of as little as 15% to 17%.  
• Complex supply chain networks. Navigating the myriad reporting standards is challenging, and companies have doubts about their ability to exert influence to reduce upstream and downstream emissions.

To future-proof their supply chains, businesses need to future-proof their carbon accounting. This means doing it accurately from the start. Where perfect accuracy isn’t possible, they must still begin the process, and be transparent about errors and omissions as they improve.

The carbon accounting challenge is greatest when it comes to supply chain emissions that fall under Scope 3 — those that fall outside of a company’s direct control. According to CDP, over half of reporting companies leave out these emissions, despite a typical company’s supply chain emissions being 11.4x greater than its operational emissions, and despite impending Scope 3 reporting regulations. 

As a guide, methodologies to get supply chain carbon accounting right should be aligned with the GHG Protocol Product Standard and Scope 3 GHG emissions inventory, while gathering as much primary data as possible from suppliers. Yet these supplier reports are often incomplete, unverified and inconsistent.

This is where high-quality carbon tracking software can help. The software should use verified methodologies and independent asset-level emissions databases, to eliminate key sources of errors or bias, and to allow for supplier comparison and asset screening. When done right, using artificial intelligence can help fill gaps in supply chain tracing, and speed up the process of tracking emissions over time.

Every actor in the global industrial and manufacturing supply chain has a role to play in reducing global emissions, while driving innovation and competition. Take Thyssenkrupp Materials Services Eastern Europe, the leading industrial materials partner in the Eastern European market. It’s now adopting digital applications to track emissions across metals supply chains and create standards for supplier transparency.

Italy-based aluminum-rolling mill Niche Fusina Rolled Products is providing its customers with product carbon footprints for its tailor-made coils, metal sheets and plates. 

Meanwhile, in a pioneering move for trade finance, Societe Generale is mapping emissions in its commodity trade portfolio to pilot access to sustainability-linked loans.

Whether it’s a manufacturer providing carbon footprints to win new business, a freight firm aligning its vessels with the Poseidon Principles, or a mine operator agreeing to green finance terms, the more accurate the data, the more effective these mechanisms become for aligning the global economy with 1.5°C.

Purchasers and suppliers need to move from business-as-usual to business-for-1.5°C. Growing carbon regulation will only accelerate the need to do so. Supply chains are the biggest source of global emissions, but there are clear ways to identify and reduce their carbon footprint, using the tools, software and globally accepted methodologies already available.