Analyst Insight: There’s an urgent need to mitigate the effects of climate change through collective action and sustainable transitions. Supply chains need to take four key steps to become transparent and accountable for their carbon emissions.

The correlation between climate change and human-driven carbon emissions underscores the urgent need for mitigation and a collective transition toward sustainable systems. Recognizing this reality, more and more countries are joining the global regulatory landscape.

Governments are placing increasing pressure on businesses to enhance transparency and accountability in their sustainability practices. In the process, companies are being compelled to disclose carbon-related data and cut emissions.

Challenges arise, however, in reporting emissions from the extended supply chain. Companies often have only vague knowledge of the activities of their supply chain partners, and are forced to rely on supplier self-reporting. Instead, they need to reconstruct supply chains through direct mapping, ensuring resilience, sustainability, security and economic health.  

The Greenhouse Gas Protocol categorizes emissions into three “scopes”:

• Scope 1: Direct emissions from owned or controlled sources. 

• Scope 2: Indirect emissions from the purchase of electricity, heat or steam by the reporting company. 

• Scope 3: All other indirect emissions that occur in the supply chain of the reporting company, including both upstream (such as purchased raw materials) and downstream (distribution, transportation, consumer usage and end-of-life treatment).

The urgency for companies to tackle Scope 3 carbon emissions is directly tied to suppliers, customers, transportation and waste. It's about understanding and reducing all the ways a company's actions contribute to climate change, even if they're not directly conducting those activities. For many companies — particularly those with a physical product and supply chain, Scope 3 emission will represent most of the business' carbon footprint, at times adding up to 90% of total emissions.  

To remain competitive, companies are going to have to comply with the  growing landscape of sustainability regulations, such as the European Union’s recent Corporate Sustainability Due Diligence Directive (CSDDD) and the U.S. Climate Corporate Data Accountability Act. They are requiring disclosures that encompass due diligence, supplier emissions, training programs and concrete actions undertaken to combat climate change.

Following are four foundational steps that can get a business moving in the right direction to address supply chain carbon emissions.

Find a fit-for-purpose technology solution that can scale. It starts with adopting technology to report emissions and provide a 360-degree view of the supply chain. Traditional approaches have focused only on direct suppliers’ carbon-emission estimates that are quick but inaccurate, and not useful for enabling detailed carbon-emission reportings. Manual tools like a product lifecycle assessment or supplier survey are more accurate, but are slow and not scalable. This is a data project, and organizations must use data-driven analytical artificial intelligence.

Companies must onboard platforms capable of aggregating data from diverse sources to map emissions throughout the supply chain. Software using AI to provide product subcomponent breakdowns, and supply chain modeling based on actual procurement data, can generate rapid, consistent and highly accurate results at scale. Such tools can identify hotspots and foster improved supplier engagement and mitigation efforts. 

Measure and benchmark using existing data. Corporations have vast repositories of procurement and operational data that can serve as a starting point for emission benchmarking. Create transparency into emission sources across the supply chain by analyzing procurement and logistics data on suppliers and the products they’re making.  This makes possible analysis of product composition, transportation modes and the foundational data needed to calculate the total carbon footprint of the product in question. In the process, patterns quickly emerge that help draw out priorities for action. Such an approach is the best way to determine systemic trends which can both reduce emissions and improve operational efficiencies across manufacturing, processing, and transportation.

The mutual reliance between supplier and buyers offers a strategic advantage for initiating emissions reductions that benefit the financial interests of all, while advancing sustainability and regulatory objectives. Through an examination of emission sources within its supply chain, a company can uncover opportunities not  only to cut greenhouse gas emissions but also to directly trim its operational expenses.

Prioritize and take action. Navigating the waters of Scope 3 emissions involves a strategic approach to supplier engagement and risk assessment. You might, for example, negotiate with a high-emissions supplier to invest in energy-efficient machinery. The cost may be higher initially, but the payoff comes in the form of compliance, reduced emissions and potentially, a more loyal and trusted supplier. This tactic also improves resilience against future regulatory actions.

Collaborate with stakeholders and suppliers. Companies should establish regular dialogues with suppliers to set joint sustainability goals. Internal teams, too, must align their efforts; procurement can't work in isolation from sustainability officers or product designers.

It’s important to take data-gathering on suppliers out of a silo, and bring it into a centralized and standardized process to avoid inundating these suppliers with redundant questions.  The Environmental Protection Agency advises companies to seek out third-party programs to  enhance internal supplier outreach efforts. Such programs can help suppliers create their own greenhouse gas inventories and effectively manage emissions with regulatory reporting. Sustainability needs can be factored into the contracting process for the setting of emissions targets, agreement on manufacturing options, and creation of a newfound transparency into supply chain emissions.

The journey toward reducing Scope 3 emissions is complex and continuous. Companies must remain vigilant, adaptable and collaborative. By harnessing technology, utilizing data intelligently, taking strategic actions and fostering partnerships, businesses can not only comply with emerging sustainability regulations, but also enhance their competitive advantage in a market that increasingly values ecological stewardship.