How can we reduce value chain emissions?

Author: ÖzlemYetkinoglu Sobhi

The ultimate goal of preparing a Scope 3 inventory is to reduce emissions from the value chain. Value chain emissions are usually out of a company’s direct sphere of control, however there are always some operations that are possible to influence.

Upstream emissions (Cat. 1-to-8) are easier to influence than downstream emissions, as companies have direct contact and leverage over their suppliers. This is particularly true for emissions from Category 1 (Purchased good and services), Category 2 (Capital goods) and Category 4 (Upstream transport and distribution) which usually represents the biggest portion of supplier emissions.

But then, it sounds like a huge and complex task to connect and work with suppliers and other value chain partners to reduce emissions. Is supplier engagement the only way to reduce Scope 3 emissions? Supplier engagement is essential in tackling Scope 3 emissions, however fortunately, it is not the only way. Supplier engagement is a piece of the big Scope 3 puzzle, an important piece, however not the ultimate piece.

Company internal measures to reduce Scope 3 emissions

Depending on the product or service the company produces/provides company internal measures can have an emission reduction impact on a much bigger scale than supplier engagement. For example, emissions from the end use of sold products (Category 11) are higher than supply chain emissions for an E&P company. Internal decisions to change the product portfolio by diversifying toward renewable energy sources will have the biggest possible impact on value chain emissions for such companies.

Internal measures can be many and diverse but in its core the strategy is to optimize company operations across all assets, to reduce the amount of material, energy and services purchased, and design smart products. Basically, design smart and use less. Never assume that operations are run the best way possible, as such an outlook will overshadow the barest abatement opportunities. There is always room for improvement, sometimes a little, sometimes more.

As the saying goes… it can be wise to not forget to set our own house in order first.

Emissions from passenger transport (Category 6 and Category 7) are directly linked to employee behavior and habits, therefore can be simply reduced by introducing strict internal travel policies, flexibility to take home office and virtual meetings and employee training. Travel agencies and passenger transport providers usually have purchase orders directly with the company (Tier 1 suppliers) and therefore companies have leverage over them. One example is helicopter transport providers, and criteria such as minimum space utility requirements, and only flying with helicopters with better CO₂ performance are among measures that can be imposed to the suppliers in addition to the in-house measures.

Emissions from Category 5 (Waste generated in operations) can also be influenced and reduced with internal measures, for example via implementing waste minimization and recycling programs.

Emissions from Category 3 are linked to upstream emissions of fuel and electricity that a company purchases. Internal measures such as implementing energy management and optimization strategies will regulate and reduce energy demand, thus the amount of fuel and electricity purchased.

But are there any internal measures that can be implemented to reduce emission from downstream Scope 3 categories also? Fortunately, the answer is in companies favor again. Integrating sustainability considerations into product design and innovation processes is the key. Producers of goods should aim to develop products that are energy-efficient, have a smaller carbon footprint, and can be easily recycled or have longer lifespans when possible. Service providers should optimize operations to reduce duration and energy consumption. Prioritize the use of renewable energy to meet the energy demand of the operations. As for fuel producers, changing the product portfolio by diversifying toward renewable energy sources is the most effective way of reducing Scope 3 emissions.

So far, we have mostly discussed company internal measures to reduce emissions. Then we also have measures that can be applied to suppliers and measures that can be applied to customers.

Measures that can be applied to suppliers to reduce Scope 3 emissions

Due to the structural complexity of supply chains in today’s global market and the high number of suppliers involved in the production and distribution of products, it usually feels like an overwhelming task to even start looking at emissions generated in company supply chains. Please refer to our earlier Scope articles, to get acquainted with best practices for efficiently screening supply chain emissions and for collecting GHG data from suppliers, as well as selecting which suppliers to engage with.

Briefly, the emission performance of suppliers can be ranked by calculating emissions with spend-based method which uses the money paid to the supplier (i.e., USD) and the EEIO emission factors (kg CO2e/USD). Suppliers with the highest carbon footprints should be the main priority when selecting which suppliers to engage with. Other important criteria are the influence the company can potentially have over the supplier and alignment with business goals and stakeholder expectations. It would also be smart to review sector guidance when available, to capture activities that are already identified as significant.

A Scope 3 dialogue should already start in the tender process. Include environmental criteria when selecting suppliers. Give preference to suppliers who have robust environmental management systems, demonstrate low-carbon practices, and offer sustainable products or services. In pursuit of this, companies can benefit from internal protocols that set clear GHG performance, reduction target and disclosure criteria for choosing suppliers in tender processes. A vetting criterion for GHG performance below a predefined threshold (i.e., kg CO₂e/km or kg CO₂e/kg) will encourage suppliers to put their own house in order. Such protocols should be specific to the service/good that will be purchased. Prioritize suppliers who offer products or services with low GHG emissions and environmentally friendly attributes. Encourage suppliers to provide product specific life cycle data.

It is also important to start such a dialogue with relevant suppliers of already approved purchases. Additionally, companies should try to guide suppliers to set emission reduction targets, short term and long term, absolute and intensity targets.

Collaborate with logistics partners to optimize transportation and distribution activities. Consolidate shipments, use efficient routing, and explore low-carbon options such as rail, sea, or electric vehicles.

Collaboration with the industry is also important, like setting jointly agreed criteria since this will increase the pressure on suppliers to comply and to meet their emission reduction targets.

Some private initiatives like volunteer ESG reporting systems, like CDP and Ecovadis has become very popular in recent years. The number of companies/suppliers that disclose annual GHG data to these reporting regimes is increasing steadily every year. The benefits are high of having a unique and a common platform where GHG data is available to track the performance of the global supply chain. Companies should try to engage in such external frameworks and encourage their suppliers also to disclose data on those platforms. 

Measures that can be applied to customers to reduce Scope 3 emissions

Finally, last but not least companies should educate and engage their customers on sustainable product use, promoting energy-efficient practices, and providing guidance on responsible product disposal. Be transparent in your communication with your customers, provide clear information on your environmental performance and the work done to lower emissions and increase the sustainability attributes of your sold products/services. Hence, encourage customers to choose such products.

Setting emission reduction targets and track performance over time

How can we correctly measure and monitor any emission reductions accomplished by our suppliers, value chain partners or by our own company? We need to set emission reduction targets and track performance over time. The recipe is as below.

1. Choose a base year and determine base year emissions
2. Set GHG emission reduction targets
3. Trace performance over time

To set meaningful targets, companies need to establish a baseline against which they can measure progress. The GHG Protocol corporate standard encourages companies to have a common base year for Scope 1, Scope 2 and Scope 3 emissions. In reality, this is usually not possible since historically companies have been reporting operational emissions but not emissions from the value chain. Scope 3 base year also does not have to be the first year a Scope 3 inventory prepared. The first Scope 3 inventory is usually not complete, and data quality is not the best. Companies choose to report a few categories first and then it a developing and an evolving process, where a Scope 3 category boundary can affect another Scope 3 category boundary. Once a Scope 3 base year is established it is important to recalculate base year emissions if significant changes in calculations and assumptions are implemented in the later years in this process. Companies should clearly define their base-year recalculation policy.

However, there is one rule that applies concerning baseline; GHG standard requires companies to establish a single base year for all Scope 3 categories.

There are two target types;

• Absolute targets focus on reducing emissions in absolute terms, regardless of the organization's growth or changes in business activities and directly aim to decrease the total amount of GHG emissions emitted and therefore robustly contribute to overall climate change mitigation efforts. These targets are typically expressed in tons or kg of emissions.
• Intensity targets aim to reduce emissions per unit of output or activity. Scope 3 emissions are very diverse and therefore setting only one intensity target for all Scope 3 emissions will lack transparency and will not reflect individual improvements achieved in the value chain. Therefore, NEMS recommends defining intensity targets per Scope 3 category and breaking it further down per purchased service/good for upstream Scope 3 categories. For example, performance of helicopter transport to offshore fields can be measured in terms of kg CO₂e emissions per passenger per km travelled, while emission intensity for drilling can be measured in terms of kg CO₂e emissions per meter of well drilled. Emission intensities give a better representation of the emissions situation and progress when they are customized in accordance with the purchased good/service. However, additionally an overall Scope 3 intensity target (that includes all categories) should also be defined in terms of kg CO₂ emissions per revenue or per amount of sold product or similar as this is easier to communicate to stakeholders.

Fortunately, we do not need to choose only one target. Both approaches have their merits and can be used in combination to effectively manage and reduce emissions. Define the timeframe within which the company wants to achieve emission reduction targets. It is recommended to set both short-term (i.e., annual) and long-term (i.e., 10 years) targets. Establish emission reduction targets that are ambitious, yet realistic and achievable. Seek input and collaboration to ensure the targets align with stakeholder expectations.

Check the availability of Science-Based Targets initiative (SBTi) or sector-specific initiatives for your sector. These frameworks align emission reduction targets with climate science and global climate goals, ensuring targets are ambitious and in line with best practices and will aid in setting realistic and achievable targets and guide on how to achieve this.

Finally, the Scope 3 standard gives the following formula to quantify changes in Scope 3 emissions over time:

Change in emissions from a scope 3 category =

Current year emissions from the scope 3 category - Base year emissions from the scope 3 category

Companies should transparently communicate their Scope 3 emission reduction targets, progress, and achievements via publishing sustainability reports, engaging with investors, customers, and employees, and participating in relevant disclosure frameworks and initiatives to demonstrate their commitment to emissions reduction and sustainability.

In conclusion, preparing a Scope 3 inventory identifies emission hot spots in the value chain and unlocks possibilities for emission reductions. Every company has the potential to reduce emissions in their value chain via measures that can be adopted internally in the company, measures that can be applied to customers, suppliers, and other value chain partners. Like other types of business strategies, such as setting targets for revenues etc. GHG management also requires setting targets and tracking them over time with established and clearly defined methods and routines. It is also important to make the reduction efforts and results visible to relevant parties by engaging with stakeholders, customers, employees and by publishing annual Scope 3 reports (that are prepared in-line with the Scope 3 standard).