Climate Change Scope 3 action in Supply Chains

Roger OakdenLogistics Management, Procurement, Supply Chains & Supply NetworksLeave a Comment

Petrochemical pollution

Action to date

More than 1700 scientists issued a global climate warning in 1992, so 2022 is the 30th anniversary. As a reflection of the time taken for action, the UN is hosting the COP27 conference in Egypt, between November 6-18, to discuss the implementation timetable for emissions reduction over the next eight years.

The planet is currently on track to be at 2.8C of warming within 80 years. There is an urgent need to transform the industrial and transport systems and how people live. And although Climate Change is a global phenomenon that is now visibly impacting economies and livelihoods, action responses for the next eight years have not improved. Only 26 countries have honoured the pledge made by all countries to improve their current climate targets and make submissions prior to the COP27 conference.

So, on that measure, confidence in government directed action is likely to be low. It therefore requires businesses and individuals to take action that helps to reduce emissions. But the record for business looks like it needs improvement.

The online magazine Eco-Business reported a report concerning 90 large transport companies (road, rail, shipping, aviation and multi-modal). It noted that while transport has the highest reliance of all sectors on fossil fuels, 87% have not set any targets between 2030 and their target net-zero year. And few had their implementation plans validated by the Science Based Targets Initiative (SBTI). This body aligns company carbon-reducing statements with the Paris Agreement on Climate Change.

An article in the Melbourne Age newspaper stated that the international audit and consulting firm PwC in Australia had reviewed the Environment, Social and Governance (ESG) disclosures by the largest 200 public companies registered on the Australian Stock Exchange (ASX) on October 14, 2022 (the financial year ends June 30). Of the top 200 companies, only165 annual sustainability reports were filed with the ASX. Therefore,18 percent of large companies were unable to report after more than three months – is that poor systems or do they just don’t care? The review highlighted the following:

  • 55 percent identify that climate change is an emerging risk to the business, but the risk is rarely quantified
  • 49 percent are committed to net-zero carbon emissions, but not necessarily by a set date
  • 49 percent disclose their indirect Scope 3 carbon emissions. These are mainly mining and fossil fuel extraction companies
  • 25 percent identify the qualifications and experience of board members for managing companies in the face of climate change
  • 18 percent explain how climate change could impact their financials
  • 6 percent identify how board members are being trained in climate change

If this is the standard of information provided to shareholders, what is being provided to their staff? It appears that Australia’s largest public companies are falling short of expectations – is the situation any better in your country?

Emissions reporting

For sustainability over the long term, businesses must quickly reduce their environmental impact. To achieve this requires reducing their carbon footprint; but to start, carbon emissions must be identified and monitored.

The International Sustainability Standards Board (ISSB) has recently voted unanimously to require company disclosures of Scope 1, Scope 2 and Scope 3 greenhouse gas (GHG) emissions. It will issue final standards to the Sustainability Accounting Standards Board (SASB) “as early as possible” in 2023. So, commencing with large companies, reporting of greenhouse gas emissions will be part of a company’s annual report.

Scope 1 emissions are direct emissions from company-owned and controlled resources, including all owned or controlled vehicles

Scope 2 emissions are indirect emissions from the generation of purchased energy, supplied by a utility provider

Scope 3 emissions are all indirect emissions that occur in the supply chains of the business – both upstream and downstream. Scope 3 emissions cover 15 categories, which include:

  • Direct production related purchased items (materials, components and intermediate parts) and indirect non-production related items (e.g, office supplies and IT services)
  • Waste generated in operations and sent to landfill and for wastewater treatment
  • Transport (all modes) inbound and outbound distribution (including by 3rd parties)
  • Capital goods are items with an extended life (buildings, vehicles, equipment) used by a business to manufacture a product, provide a service or store, sell and deliver items
  • ‘End of life’ treatment to assess how products are disposed of, which encourages the design of recyclable products that limit landfill disposal

Apple has identified that 100 percent of its emission are in Scope 3, with only 3 percent generated by Apple employees travel and commuting. Kraft Foods has identified that 90 percent of its emission are within its supply chains (i.e. Scope 3).

As the new reporting requirements come into force, large companies will require the same form of reporting from their Tier 1 suppliers. In turn, these suppliers will require compliance from their suppliers and so on. Your organisation’s reporting of its emissions performance will eventually happen.

Supply Chains group action

Identifying, tracking, recording and reporting Scope 3 emissions will be challenging and take time and resources. Although zero carbon emissions should be the aim for all countries and companies by 2050, there may be another six CEOs in your business up to that date, each of which could delay decisions about how to address climate change. However, delay carries the risk of decisions being more heavily influenced by shareholders, customers and financial firms, so why not be pro-active?

Emissions need to be reduced in 2030 by about 45 percent from 2010 levels. The more emissions reductions that are achieved prior to 2030, the less drastic (and expensive) will be the changes required between 2030 and 2050.

So, how can the Supply Chains group (Procurement, Operations Planning and Logistics) reduce emissions? As Scope 3 emissions will be a reporting requirement, gather that data. Start at the customers and work back through the supply chains, using the S&OP product family structure to identify emissions per unit of output, then build that into the S&OP process. The data then has immediate value to the business, identifying the emissions for each S&OP iteration. An extension of this approach can identify emissions reduction implementation priorities, developed by the Supply Chains group.

Emissions along an organisation’s supply chains are most likely to have the largest greenhouse gas (GHG) impact and therefore provide the most significant opportunities for improvement. This will be a major addition in responsibilities for the Supply Chains group of a business and requires a review of the supply chains strategy.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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