Analyst Insight: Increasing pressures from investors and customers, coupled with a surge in climate change regulations, are forcing supply chains to transition to sustainable practices and curb their carbon footprint. At the heart of this effort is the imperative to reduce greenhouse gas (GHG) emissions, with a focus on Scope 1, Scope 2 and, increasingly, Scope 3 emissions.

While companies show more readiness to disclose Scope 1 (61%) and Scope 2 (76%) emissions, Scope 3 disclosure remains challenging for most (86%) executives. Only 37% of executives feel prepared to disclose Scope 3 data, yet these emissions constitute 65% to 95% of a company's carbon footprint. Tracking and disclosing them are critical for effective decarbonization efforts.

Although voluntary for most businesses, measuring and reporting Scope 3 is a strategic business imperative for long-term resilience and the only way to demonstrate emissions reductions enterprise-wide. Imagine if a publicly listed company included only one-third of its business in a financial statement. This would ultimately be meaningless for investors  — and a perfect example of the importance of Scope 3 to truly understand the full breadth of emissions.

Companies need to gain visibility into Scope 1, 2, and 3 in order to pinpoint emission hotspots, identify reduction opportunities, and collaborate effectively with suppliers across their supply chains. It's also among the many steps companies will take on their journey to decarbonize their supply chains.

The decarbonization journey consists of three phases of increasing maturity:

Acquiring supply chain visibility. This is the first step toward achieving Scope 3 decarbonization. Approximately one-half of surveyed companies have insight into the sustainability practices of 50% or more of their Tier 1 suppliers. However, visibility declines significantly when considering sub-tier suppliers. Moreover, mainstream programs have been slow to adopt critical supplier engagement initiatives, such as corrective action plans and Scope 3 carbon-reduction strategies. This highlights a significant gap in integrating sustainability practices throughout the supply chain.

Buyers must gain a comprehensive understanding of their supply chains through a 360-degree view of supplier sustainability performance, and be equipped with data that can be packaged into insights to drive decision-making. Using cutting-edge solutions such as carbon hotspot mapping enables companies to pinpoint carbon emissions risks based on industry, geography and criticality of suppliers. By integrating vendor-specific carbon-emissions risk, organizations gain crucial insights for making data driven purchasing decisions. 

Helping suppliers along the journey. Modern supply chains are complex and interconnected, involving numerous suppliers across multiple tiers. Engaging with suppliers allows businesses to gain a comprehensive understanding of their carbon footprint and identify opportunities for Scope 3 emissions reduction. Through transparent and open communication with suppliers, buyers can foster collaboration that jointly delivers on the sustainability agenda and overall organizational resilience.

Going deeper, it’s critical for procurement departments to work with their supply base to reduce local environmental impact at each point in their supply chains. They can do this by engaging their trading partners on a sustainability journey, wherein they implement sustainable business practices and measure their performance year over year to create benchmarks and showcase areas for improvement and growth. 

Getting to the product level of granularity. To accelerate progress on climate targets and respond to regulations such as the EU’s Carbon Border Adjustment Mechanism, buyers require full visibility over the carbon embedded in the products, components and services they purchase. Adopting tools that enable the exchange of product carbon-footprint data across supply chains allows buyers to identify reduction potential across different stages of a product’s lifecycle, and compare emissions between products. With this enhanced visibility, they can improve their measurement of Scope 3 emissions and collaborate more closely with suppliers to produce low-carbon products to satisfy market demand.

The pieces are coming together for carbon transparency across global supply chains: disclosure standards are aligning, innovative solutions for sharing emissions data are emerging, and collaborative partnerships are expanding. Looking ahead, businesses need to embrace their role as environmental stewards and take proactive steps to curb Scope 3 emissions. By committing to supply chain sustainability and driving collective action, companies can mitigate climate impacts, drive regulatory compliance, and unlock new opportunities for growth and innovation.