In the ever-evolving landscape of corporate responsibility, decarbonization has become more than just a buzzword; it’s now a prerequisite for businesses to secure their “license to operate.” As the world grapples with climate change, governments, regulators, investors, and customers are increasingly demanding that companies step up their efforts to combat this global challenge. While many companies have made public commitments to reduce emissions, the path to achieving these goals is laden with complexities, particularly in the realm of supply chain decarbonization.
Five years after the signing of the Paris Agreement, we explore the challenges and opportunities companies face on their journey to becoming role models in the fight against climate change. We delve into key examples and provide insights into the critical areas of supply chain decarbonization, including Scope 3 emissions, carbon accounting, data gaps, uncertainty, building alliances, and sustaining engagement.
Scope 3 Emissions: A Critical Frontier
Initially, corporate sustainability commitments focused on addressing Greenhouse Gas (GHG) emissions within Scopes 1 and 2, which encompass emissions directly produced by companies or indirectly through energy purchases. However, the game is changing, with more organizations now pledging to reduce their Scope 3 emissions, which are generated across the entire value chain, both upstream and downstream. For instance, in 2020, 94 percent of the 239 companies that joined the Science Based Targets Initiative committed to reducing emissions at both customers and suppliers. This shift is significant because for many companies, Scope 3 emissions account for a staggering 80 percent of their overall climate impact.
Challenges of Scope 3 Decarbonization
Setting ambitious emissions reduction targets is one thing, but delivering on them is a formidable challenge. Achieving net-zero emissions for Scopes 1 and 2 is already demanding, especially for energy- and resource-intensive sectors. Tackling Scope 3 adds another layer of complexity. It involves navigating opaque carbon-accounting practices, fostering collaborative relationships with customers, supply networks, and industry groups, and keeping stakeholders engaged in a long-term transformation effort.
Mapping the Decarbonization Journey
Companies typically undergo three interconnected steps on their decarbonization journeys. One technology company serves as an example, starting with a broad understanding of Scopes 1 and 2 emissions and eventually realizing the need for granular insight into Scope 3 emissions. This journey required comprehensive baselining efforts, revealing that Scope 3 emissions accounted for approximately 70 percent of the company’s total emissions. This detailed analysis paved the way for a ten-year transformation program, combining internal upskilling, integration of low-carbon principles into policies and decision-making, and pilot initiatives to demonstrate immediate progress.
Challenges to Overcome
While some companies, like the one mentioned above, have made significant strides in supply chain decarbonization, many face challenges that hinder their progress. Here are five key hurdles:
- Lack of Carbon Accounting Foundations: Carbon accounting practices lag behind the demands of the modern era. Data is often scattered across multiple spreadsheets, with inconsistent databases and no standardized definitions. As carbon becomes a new currency, companies must adopt more accurate, granular, and timely emission transparency to operate effectively.
- Reliance on Secondary Data: For Scope 3 emissions, emission calculations often rely on rough activity data and standard emission factors. This approach lacks precision and consistency, making it challenging to compare emissions across suppliers. Addressing this data gap will require collaboration among value-chain partners and industry initiatives.
- High Uncertainty, Higher Costs: After implementing “no-regret” decarbonization measures like energy and material reduction, companies still face substantial gaps in achieving zero-carbon targets. These next-level levers, such as transitioning to electric vehicles in the automotive industry, require substantial investments, technology shifts, and collaboration throughout the value chain.
- Building Alliances: Achieving supply chain decarbonization requires forging alliances and partnerships with value-chain partners. However, not all alliances are created equal, and companies must prioritize their efforts and focus on those that truly matter.
- Sustaining Engagement: Decarbonization efforts demand ongoing education and upskilling, as well as sustained communication and change management. Companies can harness employee motivation by aligning their efforts with a clear purpose and incentivizing carbon-reduction initiatives.
As supply chain decarbonization becomes imperative, companies must navigate a complex landscape filled with challenges and opportunities. Overcoming these roadblocks and achieving ambitious emissions reduction goals requires dedication, collaboration, and a clear sense of purpose. By addressing carbon accounting, data gaps, uncertainty, building alliances, and sustaining engagement, companies can not only secure their “license to operate” but also contribute significantly to global efforts to combat climate change.